Three things Paschal Donohoe must decide before the budget

The key decisions set up by the summer statement – and what they mean for you

 Minister for Finance Paschal Donohoe has said that in the event of a no-deal Brexit, the Government would allow the budget to go into deficit next year. File photograph: Clodagh Kilcoyne/Reuters

Minister for Finance Paschal Donohoe has said that in the event of a no-deal Brexit, the Government would allow the budget to go into deficit next year. File photograph: Clodagh Kilcoyne/Reuters

 

Minister for Finance Paschal Donohoe has published the summer economic statement, the first key document looking forward to the budget for next year. However, it points to an unusual level of uncertainty in framing the 2020 plans, largely due to Brexit. Here are the key decisions to be made and what they mean.

1. How to deal with Brexit?

This is the crunch issue of Budget 2020. A no-deal Brexit would hit the budget sums hard, slowing growth and depressing tax revenues. The Government would also have to spend to support sectors worst affected. The Government has said that it will decide in September exactly how to deal with this, though it may be that things are not a lot clearer by then. However, the Minister has said that in the event of a no-deal Brexit, the Government would allow the budget to go into deficit next year, possibly to the tune of 0.5 per cent to 1.5 per cent of GDP. If, on the other hand, a no-deal Brexit is avoided, then the Government expects the budget to be in surplus. So the first decision the Minister must make is what kind of Brexit to budget for – and the risk is he may not know by budget day, October 8th. However, beyond allocating some extra cash to sectors worst hit, he has indicated that the shape of the package will be broadly the same in either scenario – it is just the borrowing target that will change.

2. What to do with the spare cash?

The budget will add around €2.8 billion in new resources, via higher spending and lower tax than would otherwise be the case. However, most of this money is already committed – to investment, public pay and so on. This leaves about €700 million to be fought over for budget day itself. This is less than half the 2019 budget day figure and leaves little leeway.

The first question is whether to use this for higher spending or lower tax. A certain amount is likely to go on welfare and pensions. The amount left for net tax reductions will be small – not enough to compensate for the fact that, with wages rising, most people are going to be paying a bit more anyway.

The other question is whether this €700 million will be deployed in a different way if a no-deal Brexit appears to be on the cards. This decision will only be taken closer to the time, but there will be huge demands to help affected sectors and the Government will want to avoid going too far into the red.

We also don’t know how the exchequer sums are going to look come budget day. Another surge in corporation tax could help the sums, though it has been below target so far this year. On the other side of the ledger, overspending in health could eat up spare resources. Trying to keep the figures on target for this year will be a key challenge.

3. Are there ways to raise extra cash to give more room for manoeuvre?

The Minister has found extra tax revenues in the last couple of years – in the 2018 Budget from commercial property and last year from increasing VAT. His options here for the 2020 package are limited enough. Extra excise on tobacco is always possible and there are always ways to raise small amounts of tax. But a no-deal Brexit would leave the Government loath to push up taxes on any exposed areas of the economy. One live option for the budget is a rise in carbon tax. A €10 per tonne increase to €30 a tonne could raise a gross €200 million, but the Government will be under pressure to spend a portion of this helping poorer households, and perhaps even to return more to households via a general payment. So the net sum available here could be limited enough.

*****

The bottom line is that the indications are that Budget 2020 will be cautious and will be aimed at protecting the gains already made. If a no-deal Brexit is avoided, then the economy could grow by more than 3 per cent next year, according to Government forecasts, but a no-deal outcome could mean little growth next year and a hit, in particular, to the rural economy. Diverting resources to handle this will leave little extra resources beyond those already allocating. However, the Minister has said that whatever happens he hopes to be able to increase spending as planned on investment and public pay.

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