The room for tax cuts and spending increases in the next budget is likely to be considerably smaller than the 2017 package because of new spending commitments entered into last year, according to updated Department of Finance calculations.
While Budget 2018 is expected to allow for a €1.2 billion budgetary adjustment, the real room for manoeuvre could be as little as €570 million because of the carryover effects of measures contained in Budget 2017.
Pressure on spending from an ageing population and pay rises agreed under the Lansdowne Road deal have already limited the Government’s budgetary options.
Further concessions on public pay amid the threat of strike action from unions or a significant shift in the current tax trend could leave the Government with even less scope.
A spending review, scheduled to take place prior to Budget 2018, is expected, however, to generate “efficiency gains” within the system that will free up some additional money, albeit this is not expected to radically alter the Government’s position.
In a draft stability programme update, which will be submitted to the European Commission later this month, the department said the Irish economy is on target to create 55,000 additional jobs this year and a further 50,000 in 2018, bringing the unemployment rate below 6 per cent.
Brexit threat
It said the economy was growing strongly, but warned that the threat of Brexit and a changed policy stance in the US meant that “a continuation of robust economic expansion cannot be taken for granted”.
The department has reduced its projections for economic growth in 2019, 2020 and 2021 by roughly 0.5 per cent each year on account of the greater likelihood of the UK opting for some form of hard Brexit.
However, the department upgraded Ireland’s growth outlook for this year amid a stronger-than-expected end to last year.
The department is now projecting that gross domestic product (GDP) will expand by 4.3 per cent this year, from 3.5 per cent at the time of the last budget. For 2018 a growth rate of 3.7 per cent is projected.
‘Resilience’
The document says the key goal of budget policy is to improve the “resilience” of the economy so that any adverse developments can be absorbed “with minimal fallout”.
The documents forecast that Ireland will meet its borrowing forecasts of reducing the structural budget deficit to 0.5 per cent of GDP by next year. This assumes that growth meets forecasts and that the scale of tax cuts and spending increases in the budget are in line with what was envisaged in earlier plans.
The department will finalise its pre-budget forecasts, including the amount of money it will have to spend on budget day, in a summer economic statement. Prior to that, Minister for Finance Michael Noonan will present the latest forecasts to the Dáil Committee on Budget Oversight on Thursday.
A separate report from the National Competitiveness Council, meanwhile, has warned that Ireland's failure to invest in infrastructure or to tackle under-resourcing in education would take it toll on the economy, particularly in the wake of Brexit.
