What can we expect from the upcoming Budget? Prudence

Every year in the run-up to the budget, the Irish Fiscal Advisory Council issues a report that can be reduced to just one word: prudence.

The council sees the straws (bales of them!) in the wind and warns about excessive spending, overheating and over expansionary measures.

This year has been no exception. The council has pointed to the distorted national accounts data, the prospect of Brexit, and uncertainty over corporation tax. Its description of the economic landscape? “A challenging backdrop.”

And every year, without fail, the professional politicians do their very best to ignore the warnings. Instead, they draw up budgets that are political in nature.

Nowadays, it is true, there is an element of caution. The crash of 2008 has meant no one dare to lose the run of themselves. They are also prevented from doing so by the EU’s fiscal straitjacket.

When Michael Noonan and Paschal Donohoe announce the 2017 budget in October, the total available will be just over €1 billion, split two-one in favour of spending over tax. That means tax cuts of only about €340 million (if no new taxes are raised).

To put that in context, a 1 per cent cut in the Universal Social Charge (USC) for low- and middle-income earners would absorb a huge portion of that. And the €650 million or so available for overall expenditure would hardly make a significant dent in health. So the scope is limited.

Taxes

Fine Gael has put huge emphasis on phasing out USC. But a 1 per cent cut in the rate would cost about €270 million. So what the Minister for Finance might do is increase the thresholds, by, for example, raising the entry point from €13,000 to €14,000.

Among the other measures identified in the programme for government is a reduced VAT rate of 9 per cent (down from 13.5 per cent) for new affordable houses and apartments.

Capital gains tax could be decreased to 10 per cent for start-ups, and the threshold for Band A capital acquisitions tax (including inheritances) will be increased to €500,000. Both will have an impact on the exchequer.

The tax strategy group in the Department of Finance suggested a slight drop in Dirt from 41 to 40 per cent. There is also a possibility that the PAYE tax credit of €1,650 will be abolished for those earning more than €100,000.

Other possible revenue- raising measures include an increase in excises for cigarettes and a sugar tax, although the latter is said not to come into effect until 2018.

There is also the establishment of a “rainy day fund” at €1 billion per annum. But that is unlikely to be introduced until 2019, when there should be more fiscal flexibility.

Spending

The spending programme of about €650 million is largely determined by two documents: the programme for government and a three-page agreement that sets out the conditions for Fianna Fáil supporting the Government.

It is likely that Fianna Fáil will seek a few tangible measures in the health and education sectors. These will include funds to reduce hospital waiting lists, support for elderly people, and home care packages.

The Minister for Health has already committed €50 million to target waiting lists, including €15 million ring- fenced for the National Treatment Purchase Fund.

It is likely he will seek more funds to achieve the target of reducing those waiting over six hours for hospital treatment from 32 per cent to 7 per cent by 2021.

Fianna Fáil will likely also seek part-implementation of the Cassells report, which recommended more public funding for third-level education. That extra commitment may be partly offset by some new fees for students.

Separately, funds will have to be set aside to decrease the pupil-teacher ratio in primary schools.

FF’s Willie O’Dea has suggested the old-age pension should be increased by €5 a week, but that is unlikely to happen as it would absorb a quarter of all spending. The likelihood is a more modest €2-€3.

In the housing sector, the promised increases in rent supplement and the housing assistance payment could cost up to €55 million in a full year. There are also commitments in the programme to restore the number of gardaí to 15,000.

There is also a commitment to a new town and village renewal scheme, with extra funding promised, as well as a dental package for children under six and more funding for paid parental leave.

On the welfare side, there is also a strong possibility that a Christmas bonus will be paid, though possibly pitched at 50 per cent of weekly benefit.