Donohoe earmarks €800m for new tax and spending measures in budget

Minister for Finance warns Government needs to be wary of overheating economy

Minister for Finance Paschal Donohoe: “As capacity constraints are increasingly becoming a feature of some sectors this, in turn, could lead to overheating of the economy.” Photograph: Tom Honan.

Minister for Finance Paschal Donohoe: “As capacity constraints are increasingly becoming a feature of some sectors this, in turn, could lead to overheating of the economy.” Photograph: Tom Honan.

 

The Government is to keep a tight rein on spending in the forthcoming budget with just €800 million allocated for new tax and spending measures.

In the Government’s latest Summer Economic Statement, Minister for Finance Paschal Donohoe said he was targeting a budgetary package of €3.4 billion, of which €2.6 billion had already been committed to various expenditure measures.

This leaves €800 million for allocation on budget day, Mr Donohoe said.

The figures are based on the Government achieving a headline budget deficit of 0.1 per cent of gross domestic product (GDP), and Mr Donohoe said “the Government will not adopt taxation and spending measures that result in a larger deficit than this”.

Using all the available “fiscal space” would – under the European Union fiscal rules – allow for a budgetary package of €4.3 billion, which is €900 million bigger that the package targeted by the Government.

But Mr Donohoe warned this level of spending would increase the deficit by an additional 0.3 per cent of GDP and would represent the “the wrong choice for the economy at this stage”.

Full employment

A “literal application” of the fiscal rules would damage the Irish economy, he said. “The level of employment is close to its highest ever and we are approaching what could reasonably be called full employment,” Mr Donohoe said.

“This is welcome development but as capacity constraints are increasingly becoming a feature of some sectors this, in turn, could lead to overheating of the economy,” he said.

Mr Donohoe said it was vital that Government policy did not add fuel to the fire “but that we make sensible and prudent decisions now to secure our hard-won gains and ensure the continuation of sustainable future growth”.

Mr Donohoe was asked how he could deliver meaningful tax cuts when he was committed to using the additional €800 million in budgetary resources on a two-to-one basis in favour of spending over tax cuts.

He noted, however, that income tax cuts in the last budget had been delivered by broadening the tax base, which came in the form of an increase in stamp duty on commercial property transactions. “All of those choices are open to me on budget day,” he said.

There is growing speculation that the Minister may target diesel fuel, which has a lower excise duty than petrol, but which is blamed for rising rates of air pollution in cities.

Mr Donohoe also announced that part of the current windfall in corporation tax would be diverted into the State’s so-called rainy-day fund, albeit without giving details on how much.

The Government has been repeatedly warned against developing an over-reliance on the business tax, which generated a record €8 billion for the exchequer last year.

“We can’t build permanent commitments on revenues that might not be sustainable in the future,” he said.

The Government’s plans to transfer an initial tranche of €1.5 billion from the State’s sovereign wealth fund, the Ireland Strategic Investment Fund in Budget 2019, and add €500 million a year for the next three years.

In its latest Summer Economic Statement, the Government maintained its growth forecast for the economy for 2018 at 5.6 per cent and 4 per cent for next year while noting the external environment had become “increasingly challenging”.

The statement pinpoints the UK’s imminent exit from the EU; changes to the international corporate tax landscape; and a possible disruption to international trade as the chief threats.

Housing

Fianna Fáil – whose acquiescence is needed to pass budgetary policy – has consistently said the October budget must have a particular focus on housing.

Mr Donohoe said the Government’s already announced 10-year capital investment plan, Project Ireland 2040, had a significant capital allocation for housing.

When asked if this plan could be reopened so Fianna Fáil could seek to change housing policies, Mr Donohoe said he had yet to be approached by the main Opposition party with policy suggestions for the budget.

“Well, I haven’t heard Fianna Fáil to date articulate any opposition in relation to the policy content of Ireland 2040 since it has been launched. So if they have views in relation to changes that should be made in Ireland 2040, to date they have not been shared with me. And to date, I have not heard them being made publicly, strongly.

“My understanding is that Fianna Fáil wants to see more investment in capital. They want see more investment in things that would allow more homes to be built. That is what Ireland 2040 has done. If they want changes in it, those changes to date have never been articulated to me, nor have I heard them.

“But, of course, this is my third budget now from the status of being a minority government and getting them passed, despite the expectations that many have had. And I will be approaching the next budget in the same space.”