Stop borrowing: that should be the priority for Budget 2019

If there is one thing which the Government should achieve when Paschal Donohue announces the Budget for 2019 it is to stop borrowing. The Summer Economic Statement, published yesterday, makes the case for moving the government finances into surplus – with revenues exceeding spending – though doesn't quite promise to do so. Clearly there is haggling to be done before budget day.

The Government plays the prudence card, but still leaves the way open for a package of over €3 billion. The pace of improvement of the public finances has slowed significantly in the last few years. With the economy on a crest of a wave, there is no excuse for not aiming for a budget surplus in 2019. If we are serious about moving beyond the old boom and bust cycle, this is what we need to do.

Yet the Summer Statement stops short of doing so. In fact, the Minister for Finance has left open the possibility of adding to the €2.6 billion already committed to spending increases next year with another net €800 million in additional budget measures. The Department of Finance calculates that this can be afforded, while still achieving the target of reducing borrowing to 0.1 per cent of GDP next year.

Now you might argue that 0.1 per cent borrowing is effectively balancing the budget. And it does meet the EU borrowing target . But with the economy growing so rapidly, there is a strong case for moving the budget into surplus, given that revenue growth will inevitably slow if – or should I say, when – economic growth rates decline. Because decline, at some stage, they will .

Budget 2019: Varadkar prescribes tight fiscal regime

---

‘Little or no scope’ for income tax cuts in budget, says ESRI

---

ESRI and the budget, 1,000 new jobs from Amazon, and PTSB’s split mortgages plan

---

Economy is not yet overheating, says fiscal advisory body

---

Nuanced

The text of the Summer Economic Statement itself says that the need to rebuild budget leeway and the current cyclical position of the economy “suggests the appropriate strategy is to run budget surpluses for a number of years”. The document also shows, pointedly, that six other small EU states are now in surplus and one, Slovenia, is in balance. And most of these have much lower debt levels than we do.

Yet while the civil servants writing the main body of the document are making the case for a surplus, the Ministers’s introduction is more nuanced. He is promising to not increase borrowing from the 0.1 per cent of GDP level currently targeted for 2019. This leaves open the possibility of aiming for a surplus, but does not commit to it. The budget battle has yet to be fought and the extra €800 millioin is on the table. The Government may try to spend it all and still play the prudence card.

The statement argues that, in fact, it could spend yet more again on budget day under EU rules but has decided not to do so. This may just be making a virtue out of necessity. The EU’s spending rules would, the statement says, allow it to spend another €900 million on budget day. This is in addition to the €2.6 billion already allocated and the additional €800 million more already identified as available. However pushing the envelope this far would probably involve a breach of another EU rule - the one relating to total borrowing. As we are likely to breach this rule in 2018, albeit largely due to technical factors, doing so again would surely be frowned on by Brussels.

Trade war

Mr Donohoe says he does not want to add too much fuel to the fire. In a welcome move, he has committed to starting a rainy day fund, even if initially the funding will be modest. But he needs to go further and persuade the cabinet that it must budget for a surplus in 2019.

There are short-term threats to growth, notably the risk of the UK crashing out of the EU without a deal – or a transition period – next March. There are growing fears of a trade war, while international tax changes could pose a threat to corporate tax revenues. In the longer term, higher interest rates and the end to ECB bond buying will push up the cost to the State of raising new debt, while the Central Bank’s contribution of surplus income will also decline.

There is a strong case to invest more in areas like housing next year, as outlined in the new investment programme. Inevitable spending pressures in areas like pay and health – some related to the ageing of the populaton – are also being provided for, as are carry-over costs of measures in the 2018 budget.

Beyond that, it is hard to find any case to carry on borrowing in order to fund tax cuts or more spending rises.Yet having identified scope to spend another €800 million in the budget, the Government has just fired the starting gun on a political and lobbying scramble, where everyone will try to grab a share of this cash. A prudent budget, Irish style, is still looking pretty darn generous.