WHAT GIVEAWAY? STATE STILL HAS TO BORROW €2.8BN TO GIVE US A PRESENT

DESPITE the booming economy and the large increase in tax revenue over the past two years, the Government will still be borrowing money to cover its expenditure in Budget 2016.

When all the pay and pensions, social welfare payments, student grants, industry grants, medicines, capital investment, interest payments, EU payments and other expenditures are added, the Government will have to borrow €2.755billion – equivalent to 1.2 per cent of GDP – because its tax and other revenues are not enough.

This is much lower borrowing than a couple of years ago but we are still borrowing at a rate of €594 per person per year. The Budget giveaway was €1.46billion. This was €690million in tax and €770million in expenditure. The extra economic activity generated by reduced taxation and increased expenditure increases the tax take by €230million so the net cost is €1.23billion. We have borrowed money to give ourselves a present of €1.46billion.

Nonetheless, the Coalition has succeeded in achieving the milestone of getting Government borrowing below 3 per cent of GDP in 2015, as envisaged in the 2015 Budget. This has been the target since the beginning of the public financial crisis in 2008.

The big figures of the 2016 Budget are €51billion spent on public services, social welfare and pay, and almost €10billion on central fund items such as interest charges, EU contributions, the Oireachtas and judges’ salaries. €11billion is collected in PRSI and charges for services. €47billion is collected in tax and €3billion is collected from other sources such as Central Bank surplus and dividends.

All of this means the current Budget (excluding capital investment) has a small surplus of €500million. Almost €5billion is being invested in infrastructure and other investments and sources of capital funds are almost €2.5billion. All of this results in the general Government deficit of €2.755billion.

Budget 2016 can be assessed from four angles.

Firstly, it has to conform to EU fiscal rules on borrowing, debt and expenditure growth but we are allowed to improve on these rules if we wish. Secondly, the overall economic environment for the Budget is excellent. The 2014 to 2016 economic growth performance of 5.2 per cent, 6.2 per cent and 4.2 per cent annual growth for each year respectively is the best in the EU. This raises the question of whether we should be using the good growth opportunity to more urgently reduce borrowing and debt, even if we are already complying with EU fiscal rules. Thirdly, and of great import to the outgoing Government, it is the last Budget before the general election, so naturally it has a strong political aspect. Politically this budget is a winner, even though there will be many who do not benefit. For example, apart from the increased allocation for social housing, which is welcome, there is no strong housing package. Finally, the individual expenditure and tax changes should be assessed for their social and economic impact as discussed elsewhere in this newspaper.

The Budget is compatible with the EU fiscal rules. The gross debt to GDP percentage is continuing to decline as required from 97 per cent in 2015 to 93 per cent in 2016. The expenditure rule limits expenditure growth to less than the long-term growth rate of the economy and the Government is convinced that its calculation of a fiscal space of €1.2billion will be endorsed by the European Commission in 2017.

THE final fiscal rule refers to ongoing reductions in what is described as the structural deficit. The Fiscal Advisory Council has expressed concern about expected changes in the 2016 structural deficit presented in the Spring Economic Statement. It showed a reduction of 0.3 per cent in the structural deficit from 2.6 per cent to 2.3 per cent between 2015 and 2016 whereas the broad requirement was for a reduction of 0.6 per cent. However, updated Government figures accompanying the Budget expect the reduction to be 0.8 per cent in 2016 which more than meets the fiscal rule.

Overall, the Budget meets or exceeds the EU fiscal rules. Despite this, it is reasonable to argue that the better-than-expected economic performance could have been used to reduce borrowing and debt more rapidly through a smaller giveaway Budget to deal with possible future weaker economic performance.

The giveaway for 2016 is still being financed by borrowing. However, the scale of the giveaway does not distract from the strong improvement in the public finances in the 2016 Budget figures.