1 Oct 2019, 16.40

The Parliamentary Budget Office (PBO) has published its Pre-Budget 2020 Commentary. This commentary provides Members of the Oireachtas with an overview of the current macroeconomic and fiscal position of the State and highlights key issues for consideration ahead of Budget Day.

Key Issues

1. Economic growth and Brexit

In the event of an orderly Brexit (or an extension beyond 31 October), current economic growth indicators point to an economy which may face a risk of overheating in the short to medium term.  The Irish economy continues to grow. GDP grew by 6.6% in the first half of 2019. The unemployment rate in Q2 2019 was 5.4%, while wages grew by 3.3% in the first half of 2019.

In the event of a disorderly Brexit we could expect a slower growth in 2020 and that would in turn put pressure on the public finances. For example, an increase by €104m to Jobseekers spending in 2020.

2. Budget 2020 and Brexit

Last year the PBO emphasised that the Government’s central assumption for Budget 2019 of an orderly Brexit may not be prudent. The Minister has recently confirmed that Budget 2020 will be based on a ‘no-deal’ (or disorderly) Brexit. The PBO welcomes this decision. However, additional Brexit supports (beyond what was set out in Budget 2019) will be needed to bolster industry and maintain vital public services. Funding for these supports should come from existing resources.

3. Corporation Tax Receipts

The PBO notes that since 2015 Corporation Tax receipts have been significantly higher than expected. These windfall receipts have improved the public finances. Estimates from the PBO suggest that the budget balance is now 1.3 percentage points higher because of this unexpected revenue, while the debt-to-GDP ratio is 4 percentage points lower.

The PBO notes that Corporation Tax is on track to outperform expectations again in 2019. In August, Corporation Tax revenue was already €314 million ahead of expectations. These receipts are volatile and possibly unsustainable. They should not be used to fund permanent spending as has been the case in recent years. This revenue could instead be set aside for the Rainy Day Fund, or to reduce the level of public debt.

4. Multinationals

The concentration of economic activity and tax receipts around a few multinationals also carries risks. The PBO estimates that Government revenue would reduce by approx. €440m if a typical large multinational left the State. This loss is roughly the same as a €20 increase in the Carbon Tax (€430m) or a 1% increase in the higher-rate of Income Tax (€347m).

Director of the PBO, Annette Connolly, said that “Given these risks, Budget 2020 should focus on sensible policy measures that safeguard the public services needed for a growing population. We should ensure that the capital investment needed to deal with capacity constraints is protected now and into the future. This will allow for the continued delivery of important services during a downturn and reduce the risk of a return to the large-scale cuts seen during the last economic and fiscal crisis”.

The Parliamentary Budget Office Pre-Budget 2020 Commentary is published on the Houses of the Oireachtas website and can be found here.

 

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