30 MFómh 2020, 17.13

The Parliamentary Budget Office (PBO) has published its Pre-Budget 2021 PBO Commentary.

The Commentary provides Members of the Houses of the Oireachtas with an Independent overview of the current macroeconomic and fiscal position and highlights its key issues for consideration ahead of the Budget on 13th October.

The Pre-Budget 2021 PBO Commentary highlights several issues including, amongst others:
An uncertain economic outlook
Following a period of strong economic and employment growth, the COVID-19 crisis has resulted in a severe economic shock for Ireland. Overall, economic activity, especially domestic activity, will fall in 2020 – followed by an increase in 2021 unless further severe public health restrictions need to be imposed. However, economic recovery to pre-pandemic levels will likely take several years.

Both COVID-19 and Brexit-related uncertainties have complicated fiscal planning, with multiple sizeable revisions made to fiscal forecasts since Budget 2020. While the PBO considers it prudent to base Budget 2021 on a no-deal/disorderly Brexit, these uncertainties are likely to persist through 2021. This means that it is difficult to accurately predict tax revenues or cost budgetary policies (both revenue and spending).

The need for evidence-based Exchequer spending and its scrutiny by Dáil Eireann
In 2020, the Exchequer has faced very significant spending pressures as a result of the COVID-19 pandemic. The Dáil will be asked to approve over €16 billion more in spending than was envisioned in the last Budget. Substantial spending has rightly focussed on income supports for individuals and businesses affected by the pandemic, as well as providing extra resources to the public health system.

However, the PBO is concerned that the evolving response to the pandemic has reduced transparency of the Budget process.    Information that would normally be available to Members such as the Summer Economic Statement, Mid-Year Expenditure Report and the Spending Review papers were not published this year.     

In addition, the Dáil has approved substantial additional funding with few details as to what is being delivered with that spending. This makes it difficult for the Dáil to ensure it is getting value-for-money in the spending it is approving.

The longer-term implications of the growing debt burden
The Government budget deficit cumulatively over 2020 and 2021 will likely be between €40 billion and €50 billion.  This is to fund the extra COVID spend and to meet the shortfall in taxes.  This will be added to Government debt.  Pre-pandemic, Irish Government Debt was high in historical and international terms (€204 billion or 95% of GNI* in 2019). By end-2021 it will likely reach 120%-125% of GNI*.

The high levels of public indebtedness could limit the options for fiscal policy to meet future challenges. In the medium-term, when the short-term impacts of the COVID-19 crisis have subsided, fiscal policy will need to focus on the sustainability of Ireland’s Government debt in order to reduce the risk of a future fiscal crisis.

Overreliance on volatile Corporation Tax receipts, and dependence on a relatively narrow base for both Corporation and Income Tax
Tax revenue has outperformed expectations since the onset of the pandemic and is holding up reasonably well on an annual basis.

The robust performance of Corporation Tax and Income Tax emphasises the varied impact of COVID-19 and highlights the reliance of the Exchequer on key sectors such as information and communication, manufacturing and financial services. These key sectors are dominated by foreign-owned multinational corporations.  The reliance of the State on their tax contributions could pose a systemic risk to the public finances.

While the outperformance of Corporation Tax has helped to mitigate the fiscal impact of the pandemic, it serves as a reminder that this is a volatile and unpredictable source of Exchequer revenue. The tax base should be broadened to manage some of the risk it poses.

The Pre-Budget 2021 PBO Commentary is published on the Houses of the Oireachtas website and can be found here.

A summary of its key messages is available here.

 

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