The next Budget should be very prudent – but it won’t win votes

PASCHAL DONOHOE has some tough choices to make as he prepares his third Budget for presentation on October 8, the date just little over three weeks shy of the Brexit deadline. The central conundrum facing Mr Donohoe’s Budget planning is that employment is at an all-time high and economic growth is strong. But in the shadow of Brexit, the outlook for the Irish economy is best described as “unusually uncertain”.

A plethora of advisory bodies have argued for caution in framing the Budget for next year, and sticking to the plans for this year, something which will be hard as we face another health spend over-run. For any politician certain to be facing an election just months after his Budget, all Mr Donohoe’s instincts would be for adopting a decidedly more relaxed approach.

Last month, the Fiscal Advisory Council put out a well-argued report which pointed out the budget policy has been “pro-cyclical”. Strip out the jargon and we find it means that when Irish governments had the cash, they spent it.

EU budget rules have in recent years restrained things somewhat. But the reality is that there has been little improvement in the underlying budget position since 2015, and extra revenue from company taxes has gone to fund higher spending.

In recent years there has been a general loosening of spending controls, some of it due to public service pay pressures, which has stalled the improvement in the public finances.

So Budget 2020 must be framed with two big threats in mind. Mr Donohoe cannot bank on the windfall of company tax largesse continuing. International taxation reform already poses a threat in that regard.

The other threat is the danger of a disorderly no-deal Brexit, which could happen as early as October 31. This would deliver a heavy blow to economic growth and weaken the public finances just as the Government would need to support the economy through tax and spending policies.

Everybody hopes a no-deal Brexit may yet be avoided. But the noises emanating from the UK Conservative leadership contest gives little cause for confidence.

A plethora of option documents from the Finance Department yesterday suggested a certain direction of travel which may be open to Mr Donohoe. It suggests he may have scope for tax cuts to raise the threshold at which the 40pc higher tax rate kicks in.

But that could mean having to choose not giving an across-the-board welfare increase as we have seen in recent years. We already know that carbon taxes must be increased in the Budget.

So, economic prudence suggests Mr Donohoe do as little as possible on October 8. But that will not be a help in winning voter confidence – unless the voters themselves wise up and face reality, recalling the very recent grim years of recession.