Government trying to keep pressure for spending in check

Paschal Donohoe dampening expectations ahead of budget

Minister for Finance Paschal Donohoe has sent out warnings about the need for  caution, despite the favourable economic outlook, partly due to the danger and considerable uncertainty caused by Brexit. Photograph: Dara Mac Dónaill

Minister for Finance Paschal Donohoe has sent out warnings about the need for caution, despite the favourable economic outlook, partly due to the danger and considerable uncertainty caused by Brexit. Photograph: Dara Mac Dónaill

 

Minister for Finance Paschal Donohoe had a few messages which he clearly wanted to send out with the department’s updated economic forecasts published on Tuesday.

One was that spending is already set to rise by €2.6 billion next year, reducing room for further budgetary measures.

The signs are that the Government is trying to change the way we approach the budget – and move away from trying to spend as much as allowed under EU rules.

Whether this survives the inevitable political push and pull in the months ahead remains to be seen, with expectations already high about what will be possible come October in Budget 2019.

The Minister has sent out a series of warnings about the need for some caution, despite the favourable economic outlook, partly due to the danger and considerable uncertainty caused by Brexit.

At the moment the Department of Finance’s forecasts assume there will be a transition deal after the UK exits from the EU lasting until the end of 2020 and a free trade deal thereafter, but of course this could all change.

Interestingly, Fianna Fáil finance spokesman, Michael McGrath, issued a statement on Tuesday underlining his view that the risks to the economy must be heeded and supporting plans to put some cash away in 2019 in a rainy day fund.

Fiscal space

The figures published on Tuesday do not give us an updated estimate on how much leeway the Government will have in the budget for tax cuts and spending increases – the so-called fiscal space.

More detail can be expected when the Summer Economic Statement is published in June or July, though there are signs that the Government will try to play down the scope available and concentrate instead on the appropriate overall budgetary approach.

Donohoe went out his way to underline that substantial additional spending commitments, amounting to €2.6 billion have already been made for 2019. These include €1.5 billion in additional investment spending under the new Government plan, plus existing commitment to increase public sector pay, deal with demographic pressures and the carryover cost of 2018 measures.

Much of this will eat in to the €3.2 billion which official forecasters had previously estimated to be available for new tax and spending measures for 2019, though some will already have been counted into the spending base and so will not affect the previous estimates.

Multinational activity

The department will now enter into discussions with the European Commission to finalise its forecasts. This is complicated by the impact of multinational activity on the Irish economy, which boosted growth last year to 7.8 per cent.

In turn this faster growth, under existing EU rules, means our borrowing should be reducing more rapidly. However the department has worked on alternative estimates of the impact of growth on our national finances which bring us into line with the EU target.

Assuming the European Commission signs up to this, it should not have any significant impact on the budget plans for next year.

Interestingly, the IMF, in an assessment of Apple’s operations, estimated in a report on Tuesday that the iPhone was effectively responsible for one quarter of measured Irish economic growth of 7.8 per cent last year. This relates to Apple’s move on its intellectual property to Ireland.

As the IMF points out, much of this had little real impact on the Irish economy.This supports the department’s case that GDP is overstating our growth rate.

Pressure has come back on Government spending, as the recovery took hold. The Government will now try to keep this in check heading towards the budget, but with demands all over the place – in health, housing, education and so on – and general election speculation in the air it will not be easy.

The stability programme update was the first attempt to dampen down expectations. But the big battles on Budget 2019 still lie ahead.

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