Taking cover: Taoiseach Leo Varadkar at the launch of the development of the Brewhouse building on the Abbey Quarter site in Kilkenny. PHOTO: NIALL CARSON/PA WIRE

Tax cuts for middle-income earners look set to be off the table in the Budget this October if the UK crashes out of the EU without a deal.

Taoiseach Leo Varadkar has said a no-deal Brexit would be a "game changer" for Budget plans and is "something we should be afraid about".

He was responding to criticism from DUP leader Arlene Foster, who claimed he was involved in "Project Fear mark two".

Mr Varadkar said: "In terms of fear, I think we should be afraid of a no-deal Brexit.

"A no-deal Brexit would have very serious impacts on the economy, North and south, and on Britain. It could have security implications as well and it could have constitutional implications.

"It's something that we have to prepare for nonetheless. It is something we should be afraid about."

While Mr Varadkar would not confirm that tax cuts are at risk, Fianna Fáil has said it will push for resources to be diverted towards preparing for the economic chaos caused by a no-deal Brexit.

Privately, party sources signalled tax cuts could not be part of the Budget package in a no-deal Brexit scenario.

The Fine Gael-led minority Government will need Fianna Fáil's backing in order to pass a Budget in the autumn.

Fianna Fáil finance spokesman Michael McGrath told the Irish Independent last night: "If the assessment come the first week of October is that a 'no-deal' Brexit is the most likely outcome, then the overarching priority in the Budget has to be to prepare the country for the major economic disruption that will follow."

UK Prime Minister Boris Johnson's insistence that the UK will leave the EU on October 31 with or without a deal has raised fears that a no-deal Brexit is now on the cards with Ireland and the EU refusing to entertain Mr Johnson's demand that the withdrawal deal be renegotiated and the backstop scrapped.

With Budget negotiations between Finance Minister Paschal Donohoe and Fianna Fáil due to begin in the coming weeks, Mr McGrath added: "If we are staring down the barrel of a disorderly Brexit, supporting the worst affected sectors of the economy will be Fianna Fáil's key priority in the Budget."

Two senior Fianna Fáil sources indicated that tax cuts could not feature in a no-deal Brexit Budget in October.

"If we're heading off the cliff, the Government would have some job explaining that tax cuts were the best use of very limited resources at such a time of crisis," said one.

Another source said they assumed tax cuts would not be possible given the potential hit to the Irish economy of a no-deal Brexit.

It comes amid renewed warnings from the State's budget watchdog about Ireland's ability to absorb the consequences of a no-deal Brexit. Irish Fiscal Advisory Council (IFAC) chair Seamus Coffey said that revenues from a booming economy and record corporation tax receipts are being "used as quickly as they are coming in".

"In the circumstances we find ourselves in we still only ran a small surplus last year when we should have been running a much larger surplus to absorb the negative consequences of no-deal Brexit if we want to avoid increasing taxes and reducing spending," Mr Coffey said.

He also said that favourable borrowing conditions for Ireland could be affected if a no-deal Brexit leads to a Budget deficit.

"If a deficit opens up they could be more reluctant to lend us money and we may be forced to reduce the deficit if Brexit turns out to be particularly bad."

Speaking in Co Kilkenny yesterday, Mr Varadkar said the Budget would be "characterised" by Brexit and climate action amid widespread expectations that carbon taxes will be increased.

"The Budget hasn't been written yet but obviously Brexit is a game changer in terms of everything, certainly a no-deal Brexit would be a game changer in terms of Budget plans, but that doesn't mean the five-year plan doesn't stand," he said.

At the Fine Gael ard fheis last year, Mr Varadkar set out a five-year plan to raise the threshold at which people pay the higher rate of income tax from €35,300 to €50,000. The Department of Finance estimates Mr Varadkar's tax pledge would cost €2.3bn in its recent tax strategy papers.

Mr Donohoe will decide in September whether to proceed with Budget plans on the basis that the UK is crashing out of the EU at Halloween.

Irish Independent