Follow the money: Budget 2019 is about spending not tax cuts
Ministers are playing up tax reductions, but the extra cash is going to higher spending
Budget day will see the usual flurry of calculations about the winners and losers. But politically and economically this year’s budget is all about spending. There will be a bit of “look over here” going on, as tax measures to help the “squeezed middle” are unveiled, paid for by higher taxes on diesel and VAT increases. But we need to follow the money here – and pretty much all of it is going on higher spending.
This reflects political pressures in areas like health and housing and creates one key headache for Ministers – persuading voters that they can actually deliver improvements. Tax cuts are an easy sell – convincing the public you can fix the health service or the housing crisis is much trickier. But health and housing are where the pressures are, so pretty much all the additional resources next year will go to spending.
The rapid rise in spending over the past few years is being paid for, in part, by soaring corporate tax revenues. On Friday we heard news of another unexpected surge in corporate tax revenues, now set to come in €1 billion or more higher than expected this year. This is welcome, of course, but also needed to help pay for yet another big spending over-run in the Department of Health.
We do need to be ready for the day when we get an unexpected hit on corporation tax, rather than a surprise boost. Minister for Finance Paschal Donohoe in his budgeting for next year is assuming that much of the extra boost this year is a once-off – and is setting money aside in a rainy-day fund which is, in-part, funded by these booming revenues. But international tax reform or any hit to one or two of the really big US tech firms are both key risk factors for our tax revenues.
The budget negotiations have continued to assume the best and featured the usual haggling, albeit that EU budget rules now put limits on this. But as most of the extra money for next year is already spent, this has left the Government with limited scope for budget day itself and led to tricky political negotiations with Fianna Fáil and the Independent Alliance.
But this is all a sideshow to what has already happened. The real action took place months ago when the Government announced its capital investment plan for the years ahead and locked in other spending increases. This is the side of the budget where all the action is.
Earlier this year, the Government announced that €2.6 billion in additional spending was already allocated for budget day. With an estimated €3.4 billion available in total for new measures, this left just €800 million for new spending and tax measures in Budget 2019.
The political advantage of this is that it has left the Government in full control of the bulk of the new spending for next year, all announced well before the budget talks. Some of this involved carry-over costs from last year’s budget and meeting the costs of an ageing population, the kind of add-ons which always have to be accommodated. But most involved clear decisions on where to allocate resources. The political disadvantage is that it left the sums tight for budget day itself.
In the summer economic statement, Mr Donohoe confirmed there would be a €1.5 billion boost to capital investment spending next year and an additional €400 million on public sector pay. Extra allocations under both these headings will be made on budget day. Add in other budget-day increases, including the normal package of social welfare rate rises, and the vast bulk of the additional resources for 2019 available to the Government will go on spending.
Even before the budget, discretionary Government spending is set to rise by 5.5 per cent and this will probably increase to 6.5 per cent or more after next Tuesday.
Spending is likely to be €3 billion or so higher next year than this year, while the tax package will probably be worth €300-€400 million. The promise to use two thirds of additional resources on extra spending and one third on tax cuts is long forgotten. The tax package will be an afterthought to a budget based on spending.
Rising spending has been the reason why the sharp improvements in the budget balance seen in the wake of the crisis suddenly slowed. As the recovery set in, pressures on the government to spend and invest more became politically irresistible. The Department of Finance itself has pointed out that at this stage of the recovery most of the small open economies in the EU have their budgets in surplus. With the added complication of our reliance on corporate tax revenues, we would be better to have been well in surplus by now too. It is welcome that the Minister is at least now saying he will finally balance the books next year, rather than aim for a small deficit, though achieving this will require finally getting a grip on health spending.
The Government has said that it is determined to end the boom to bust cycle. The trouble is, we are now relying on the boom – or at least the continuation of decent growth – to fund the level of planned spending increases over the next few years and pay for vital infrastructure investment. Strong growth may continue for a while. But talk internationally now is of when the US economy will slow and when euro zone interest rates will rise. And the Brexit risk looms, too, particularly the economic jolt which a no-deal exit would deliver next year.
We have had a good run and sooner or later growth is going to slow. The challenge for Mr Donohoe next Tuesday is to take advantage of the current favourable backdrop – but not to place too heavy a bet on it continuing.