Paschal Donohoe hints at higher taxes amid Brexit risks

Minister for Finance says ‘real care’ must be taken on spending to avoid overheating

Minister for Finance Paschal Donohoe has hinted he may refrain from tax cuts and consider increasing taxes to dampen price and wage pressures in the Irish economy and prevent it from overheating.

In an interview with the Financial Times, Mr Donohoe said he had to ensure government spending "doesn't accelerate economic overheating".

The warning comes amid the threat to Ireland posed by the UK’s departure from the European Union. With the second phase of London’s negotiations with Brussels on an exit deal expected to begin in March, the stakes for the Irish economy are high.

"I would expect the difficulties of phase one and all of the challenges about that will easily be matched by what is to come," the Minister told the Financial Times.

A no-deal Brexit would cause significant damage to the Irish economy, he added.

“We would be the worst affected of any member state of the EU and this is why we need to take real care about long-term spending decisions,” he said.

“We want a future UK-EU trading relationship that reflects the fact that Ireland has the largest trading exposure to the UK of any EU country.”

Ireland wants the UK to stay in the EU customs union after Brexit - an option that is not the favoured position currently stated by Theresa May’s government.

“While the British government have indicated that they will not be part of the customs union they have yet to indicate what they would believe their future customs policy will be,” Mr Donohoe said.

Transition period

His comments follow EU Brexit negotiator Michel Barnier’s statement on Wednesday that the transition period after Brexit, scheduled for the end of March 2019, should last only until the end of December 2020, when the EU’s current budget period ends.

Mr Donohoe said the binding commitment made by the UK earlier this month to avoid a hard border in Ireland meant this question was settled “to the extent that it can be” ahead of the phase two trade talks.

The Minister said he did not believe the economy was overheating at the moment, but “the risk is there”, and he would “rather take measures now to try to deal with that risk than have to take measures that are after the event”.

His cautious remarks were made despite projections he may have more than €3 billion at his disposal next year for tax cuts and spending measures.

“As additional budgetary resources become available, it’s not a given that we should have to spend all this money,” he said.

“We need to make decisions for the long-term resilience of the Irish economy and how we deal with opportunities for structural reform and for reducing our debt levels are equally valid uses of such money.”

Laura Slattery

Laura Slattery

Laura Slattery is an Irish Times journalist writing about media, advertising and other business topics