Budget 2017: Financial package of €1.3bn to breach important European Union rules, warns watchdog

Significantly higher than expected spending increases have been unveiled by Minister for Finance Michael Noonan and Minister for Public Expenditure and Reform Paschal Donohoe.

However, the decision to increase the budget package led to warnings from the chairman of the Irish Fiscal Advisory Council, the independent budget watchdog, that the Government had gone beyond what was prudent and was set to breach key EU rules.

The highlights of the budget were a €5 a week increase in the pension and other welfare payments, a comprehensive childcare package, measures to help first-time house buyers and a modest cut in the universal social charge.

Borrowing target

However, the measures will cost the exchequer an extra €1.3 billion – significantly higher than the figures mooted just a month ago. In all, less than a third of available money has gone in tax cuts.

The chairman of the fiscal advisory council, Prof John McHale, expressed concern last night that when the budget package was combined with earlier additional spending commitments the total increase in spending and tax cuts for next year would come to €3 billion over and above 2015.

Last month, he told the Dáil budget oversight committee that the Government’s budget day package, estimated at that stage at €1 billion, was “at the limit of the range of prudent policies”. He said last night that the Government was now set to miss a key borrowing target for this year – the so-called structural balance.

For next year, the Government was on course to miss the expenditure benchmark level – its overall spending limit, he said.

The emphasis on extra spending rather than tax cuts reflects the make-up of the Dáil with the Fine Gael-led minority government dependent on the support of Independent Ministers and the acquiescence of Fianna Fáil to get the measures through.

Muted applause

In contrast with budget speeches down the years, there was almost no heckling from the Opposition during the speeches of both Ministers and very muted applause from the Government benches when they finished. The Government is now bracing itself to resist a raft of public sector pay claims that could derail a budget already heavily geared towards extra spending.

Mr Donohoe warned the Dáil that the extra funding for health, education and childcare had been possible only because of public pay restraint.

He said the budget included a provision of €290 million for pay increases agreed under the Lansdowne Road Agreement but no more than that.

With gardaí, teachers, nurses and other groups lining up to take industrial action in support of claims for payments over and above those in the agreement, the Government’s response will be a test of the budget strategy.

In his budget speech, Mr Noonan said that when he took office in March 2011 the budget deficit for the year was 32 per cent while he was forecasting a deficit of just 0.4 per cent for next year. Unemployment had been almost halved over the period and borrowing costs were a fraction of what they were.

Main points

• €335m allocated to reduce USC – 1 per cent rate to 0.5 per cent, 3 per cent to 2.5 per cent and 5.5 per cent rate to 5 per cent.
• €35 million is being provided for single affordable childcare scheme which will commence in September 2017.
• First-time buyers of new homes will be entitled to tax rebate of up to €20,000 to fund their deposit under help-to-buy scheme.
• State pension and other social welfare payments to increase by €5 per week from March 1st. Cigarettes up 50 cent a packet of 20 to €11.
• Sugar tax to be introduced at same time as in UK in April 2018. Inheritance threshold (category A) up by €30,000 to €310,000. Interest relief for landlords increased to 80 per cent. Full 100 per cent restored over number of years.