Donohoe relying on continued corporate tax bonanza to keep up level of spending

THERE were few major changes in either the spending or the revenue sides of the 2020 Budget, and the Government will still be relying on hefty corporation tax receipts to fund spending.

Even though economic growth is expected to slow sharply in 2020 to just 0.7pc from a projected 5.5pc this year, tax heads are expected to keep on delivering with corporation tax revenues in 2020 projected to rise to €10.4bn and income tax to €23.9bn.

It is not just in 2020 that the Government sees another record year for company tax receipts, it is all the way out to 2024. If the UK leaves the EU with a deal, Finance Minister Paschal Donohoe expects to be able to record another small budget surplus next year; if there is no deal, the deficit will be 0.6pc of gross domestic product, he said.

Yet even after years of bumper economic growth and a surge in corporation tax revenues, which have more than doubled from their long-term average of 10pc of total tax revenues from 1984-2016, there was little wiggle room for Mr Donohoe in the Budget.

“The sobering reality is that despite all of Ireland’s well-documented growth it is just about balancing the books and with a net debt of close to €180bn there is very little capacity to deal with future slowdowns,” said EY chief economist Neil Gibson.

The lack of flexibility mostly down to repeated overspends on the health budget that have been running at an average of €500m a year in recent years, and where overspends are then built into next year’s budget.

That is happening again, and Mr Donohoe said expenditure on health was set to increase by 6.3pc to €17.4bn in 2020.

That €1bn will be used to fund a supplementary estimate of €335m.

Beyond the relatively bland headline numbers in the Budget, there are risks to the deficit from Brexit. The Economic and Social Research Institute (ESRI) warned recently that a hard Brexit could tip the economy into recession next year, compared with the current Government forecasts of 0.7pc growth and that a supplementary budget may be needed come January.

The Irish Fiscal Advisory Council (IFAC), in pre-Budget submissions, highlighted the risks of a much harder hit to the Budget from Brexit. Using ESRI forecasts, it said the impact on the Budget could be deterioration in the deficit as a proportion of gross domestic product by 1.7 percentage points and by as much as 3.2 percentage points using the Central Bank scenarios.

That will have a substantial knock-on effect on the State’s debt reduction that has seen debt levels decline to 64.8pc of gross domestic product by the end of last year and IFAC warned that the Government “might need to cut spending or raise taxes to prevent debt ratios from rising”.

“The cost of mitigating a no-deal Brexit is likely to outstrip what has been set aside, but the level of uncertainty and the political ramifications of placing a number on the total cost meant that the Budget was more a signalling of intent regarding intervention and support than a recognition of the true fiscal cost,” said EY’s Mr Gibson.