A prudent budget? Go figure.
With spectacular revenues generated from corporation tax revenues, business has created a backdrop for Budget 2019 that could not be better. The sheer scale of these resources has allowed government to deliver the largest ever single increase in capital expenditure. Corporation tax revenues have more than doubled over the past five years, with particularly large outperformances in 2015 and 2018. This is the vital context in analysing where Budget 2019 fits with the business agenda.
The investment focus adopted in Budget 2019 is the right approach. Improving quality of life is a core issue for business and it is positive to see the substantial increase in investment while still achieving a balanced budget. However, what is concerning is that too much of the corporation tax boon has been incorporated into the country’s day-to-day spending commitments rather than capital investment in productive assets. Today we see the higher than expected corporation tax receipts being largely matched by budget overruns in health expenditure. This goes against the principle of sustaining economic growth.
What needs to happen is for a greater share of spending be allocated to productive investments. Higher education being a case in point. Today’s announcement of a new ring fenced National Training Fund for new higher education initiatives must be acknowledged. However, this is not nearly enough. On a pro rata national income basis, universities in the UK and Netherlands are performing four to five times stronger than in Ireland. Unless we deliver increased investment for the higher education sector, we risk long-term damage to Ireland’s reputation as a place to do business and ultimately this will lead to an erosion of the tax revenues which fund a wide range of public services.
Today is certainly a spending budget and its tax elements are underwhelming. The current spending increases are substantial and the tax hikes, particularly the increase in VAT for the hospitality sector, will damage competitiveness at a time when the cost of doing business is already growing sharply.
As Budget day 2019 draws to a close the business community must coalesce on this core point: Government policy should focus on redirecting the resources delivered by the private sector into capital spending in public infrastructure. While this will lead to a gradual reduction in competitiveness in the short-run, by adopting this strategy now it will lead to a sustainable future.
Read Ibec’s Budget Day analysis and listen to the Ibec Budget Day podcast.