Economic Commentary

Time to adjust Budget expectations, tax cuts are off the table

‘A cautious and restrained budget may seem at odds with an economy that is more than 50% larger in GNP terms than it was five years ago and is one of the world’s fastest-growing developed economies. But Minister Donohoe, as expected, pointed to the twin threats of a global slowdown and Brexit as reasons to avoid any large-scale giveaways. Regardless of the reasons cited, most economists would approve of restraint at the peak of the cycle, though it is worth remembering economists don’t have to get elected! The sobering reality is that despite all of Ireland’s well-documented growth it is just about balancing the books and with a net debt of close to €180bn there is very little capacity to deal with future slowdowns. If Ireland can’t pay off debt at the peak of the cycle what does that tell us about its economic foundations?

‘Public expenditure has risen strongly in line with revenue, despite the messages of restraint and welfare savings as the labour market has improved. A growing population, the legacy of underinvestment in infrastructure, well-documented shortfalls in health spending and a growing recognition of education’s relative spending deficit reduces the Minister’s ability to limit his adherence to so called ‘counter-cyclical’ economic policy. As a side note, the EU’s approach to the last crisis was far from counter cyclical, it will be interesting to see if the same approach is taken during the next slow-down? The harsh reality is that more tax will be required, or a renewed effort will be necessary to find efficiencies in what we currently spend. Neither will be popular. This is before we get to tackling the climate change and emissions crisis. Perhaps the cautious and restrained tone is therefore justified - giveaways will not be the reward for Ireland’s success.’

No giveaways, there is too much to do: ‘Today was proof that a booming economy no longer guarantees an upbeat and self-congratulatory Budget. Minister Donohoe, correctly, pointed to the risks facing the Irish economy and the fact that even after five years of impressive growth the economy is not running a surplus. Looking at the infrastructure and public policy needs and the challenge of tackling climate change it is reasonable to surmise that the era of wide spread tax cuts and giveaways is gone for good.’

Me, my community or my planet? ‘Budget analysis often focusses on the individual. Who is better or worse off and by how much? Understandable, but there is growing recognition that money is not the only barometer of success. What of our healthcare and education systems, our safety and, increasingly, what of the health of our plant? We are being asked to think is a less inward way, to look at the bigger picture, the community and world around us. In that regard it is right to see an escalation in carbon taxation and investment in improving public service quality even if it means individuals will not have more money in their wallets at the end of the week’

No-deal now the base case

‘The first 15 minutes of Minister Donohoe’s speech was dedicated to dealing with a no-deal Brexit, indicating how significant the Government expects the impact to be. The base case for the economic forecasts is now a ‘no-deal’ outcome, growth is expected to fall from 5.5% this year to just 0.7% in 2020. The intent to provide funding to mitigate adverse Brexit effects was prudent but it will be how quickly and effectively this is deployed that will determine its effectiveness. In the event of a no-deal outcome there will be businesses who will need very rapid support to solve cash-flow challenges but there can be no expectation that this becomes a long-term source of support. The money must be used to buy time and then help firms to adapt to the new trading conditions, assuming no-deal conditions persist. There will need to be flexibility in the deployment of support and it was slightly surprising how detailed the commitments were to different schemes and Departments. Amazingly, just three weeks out it remains unclear whether the UK will indeed leave on the 31st of October and what form of deal, if any, will be struck.’

Tax for purpose the new norm

‘Tax increases, especially in a booming economy are always a tough political sell. The linking of tax to beneficial spending plans is becoming more common. The ring-fencing of carbon tax receipts to spending on climate change measures was a further example in Budget 2020. This is often easier for citizens to accept and tougher for businesses to argue with, but it does run the risk of creating a very fragmented tax and expenditure system. It can also reduce the flexibility needed to adjust to unforeseen circumstances.’

Midlands

The recognition of the economic hardship endured in the Midlands on the back of high-profile job losses was recognised with a basket of development measures totalling just over €30m. This will be welcomed in the area but there are risks with interventions of this nature. How do other areas qualify? What constitutes enough hardship to warrant support? Emergency measures can be justified but they do set a precedent for future Budgets.

Brexit

The cost of mitigating a no-deal Brexit is likely to outstrip what has been set aside, but the level of uncertainty and the political ramifications of placing a number on the total cost meant that the Budget was more a signalling of intent regarding intervention and support than a recognition of the true fiscal cost.

EY’s own estimates of a no-deal impact on Ireland are slightly more modest than those presented in the Budget (1.3% in 2020 compared to 0.7%). The offsetting effects of a steady flow of migrants into Ireland, a likely government intervention package and some displaced activity from the UK provide partial insulation in an aggregate sense. This would be of little comfort, however, to the individual firms adversely affected. The Government will need to be nimble and flexible in the support it offers as there will be unexpected.