Brexit and weak taxes leave Government in budgetary straitjacket

Cantillon: ESRI calls for budgetary caution amid ‘countervailing trends’

Income, corporation and excise have all taken in less revenue than expected this year

Income, corporation and excise have all taken in less revenue than expected this year

 

With the storm clouds of Brexit looming, a new pay deal all but agreed and an unexplained weakness in tax revenue ongoing, the Economic and Social Research Institute (ESRI) issued an unusually stern warning this week about the need for budgetary caution.

“2017 has seen certain countervailing trends emerge in relation to the overall positive performance of the Irish economy,” Prof Kieran McQuinn said, noting that while growth was strong and unemployment was falling, Government tax revenue had slowed significantly.

Income, corporation and excise have all taken in less revenue than expected this year. The weakness in income-related taxes is particularly puzzling as it coincides with an acceleration in employment growth, which should, in theory, benefit Government coffers.

The anomaly appears to relate to the universal social charge (USC), which is lumpy at the upper end. In other words, the tax take from the top 20 per cent of earners, which divvy up the lion’s share, flows in uneven amounts in contrast to PAYE. Various tweaks to the tax in recent budgets also makes it more difficult to predict.

Next Tuesday’s half-year exchequer returns will reveal the gap between actual and targeted tax receipts, a metric that will have a bearing on the Government’s planned budget adjustment.

While the budget is expected to allow for a €1.2 billion adjustment in 2018, the real room for manoeuvre is expected to be €400-€500 million because of previous spending commitments, specifically the carry-over effects of measures contained in Budget 2017, which may explain the ESRI’s note of caution.

A hard Brexit is also expected to reduce the fiscal space available to the Government by at least €200 million a year from 2019.

All of which points to a tightening of budgetary policy in the coming years, not an inviting prospect for an austerity-weary public, and Taoiseach Leo Varadkar has already begun making noises about dumping the party’s long-standing commitment to phasing out USC.

How the State’s obvious infrastructural deficits in health, education, housing and water are to tackled within this narrow confine is perhaps the biggest question for the Government.

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