Budget 2020 will be an unusual affair. Because the Government does not want to get caught with its figures being thrown out of kilter by a no-deal Brexit, this is the basis on which the budget calculations are being made. Whether a no-deal will happen – and if so when it might happen – is still unclear, of course. But Minister for Finance Pascal Donohoe says this is the prudent course to take. And with a chance of another extension and the uncertainty rolling on into 2020, there is no point waiting around.
So while budget figures are always at the mercy of events, Budget 2020’s forecasts will only hold if a no-deal Brexit does actually take place. The pre-budget White Paper, published on Saturday morning,forecasts the outturn for 2019 and the outlook for 2020 before budget measures. It shows clearly the impact a no-deal Brexit would have.
First of all look at the overall borrowing numbers. There is now expected to be a surplus of 0.2 per cent of GDP this year, or €600 million, as taxes and particularly corporation tax come in ahead of target. If the economy was to continue growing as it is now then you would expect the starting position for 2020 before the budget to be an improvement, in other words a bigger surplus. However, a no-deal Brexit is estimated to slow GDP growth to just 0.7 per cent next year. This would hit tax revenues and so, before any budget measures are counted in, the prediction in the pre-budget White Paper is that the opening position will wipe out the surplus and see the budget in balance for 2020.
Extra money will be allocated in the budget, both on some limited normal measures – tax and welfare – and on putting in place a Brexit contingency fund. After these are counted in, the aim will be to borrow somewhere between 0.5 per cent and 1.5 per cent of GDP next year. If a no-deal does not happen, then the budget would be expected to go back into surplus.
Rainy day fund
The exact financing and funding of the Brexit contingency will be announced next Tuesday. Yesterday, the Minister said he would not, as expected, transfer €500 million into the rainy day fund at the end of this year, as there is no point in borrowing money to do this. A further €1.5 billion will be transferred from other existing state resources into the fund and will be put on stand-by in case the Brexit shock is worse than expected.
A no-deal Brexit would lead to more cash being collected by the exchequer in one area. Because Ireland would be obliged to levy tariffs on imports from the UK, there would be a big estimated €850 million jump in customs duties. However the bulk of this – around 80 per cent – would then be remitted to the EU, contributing to a significant €1 billion increase in our forecast contribution to the EU budget, also being driven up by rising GDP. Elsewhere tax growth would be hit by a slower economy and even with the customs boost overall tax revenue growth would slow to less than 4 per cent.
The figures confirm that corporation tax remains increasingly important, expected to come in €800 million ahead of initial estimates this year and €300 million above revised expectations during the summer. This tax is now expected to total €10.28 billion this year, rising to €10.44 billion next year. Higher corporation tax is again central to paying for overspending in some departments, including health. Supplementary estimates totalling €450 million have been agreed to account for this overspending, less than the €1 billion plus last year .
There are some other notable swings in the figures. Central Bank surplus income paid to the exchequer is expected to fall by over €1 billion to €1.3 billion. This relates to the Central Bank's sale of special bonds it took on during the IBRC liquidation, the scale of which is slowing, reducing its profits. On the plus side, NAMA is due to return €2 billion of its surplus.
The spending totals outlined in the pre-budget White Paper, with total expenditure up by €1.5 billion to just over €66 billion, will change on budget day itself. The Minister has indicated that as things stand some €2.1 billion has been committed to higher spending in 2020. This has left around €700 million for what might be termed normal budget measures – tax and welfare changes. There will be some revenue raising to add to this, but the Minister indicated that he would not raise too much extra revenue , given the Brexit threat. However, a rise in carbon tax does appear to be on the cards, albeit a modest one,
All in all it will be a strange budget, based on an event which may never happen. But we live in strange times. The main focus is likely to be on the Brexit measures, the scale and scope of which will bring home to people the economic threat that this would bring.
