Economic and fiscal context
What is in the budget?
- The Department of Finance expects the economy to grow by 4.2% in 2016 and 3.5% in 2017, driven by strong domestic demand. The technical assumption in the Department of Finance’s forecasts of euro/sterling of £0.85 in 2017 now looks unlikely. As a result the forecasts underplay the likely impact of Brexit.
- The current side of the public finances is expected to be in surplus of just over €2 billion including interest payments in 2017. Before interest, the state is running a €8.3 billion current surplus. On the capital it is running a €4.1 billion deficit.
- Including non-exchequer and one-off items the Government expects the budget to in effect be balanced, with the deficit falling to only -0.4% of GDP in 2017.
- The budget saw total new policy changes worth €2.1 billion of which €900 million (Lansdowne Road pay increases, and demographic service pressures) had already been baked in. The budget saw the announcement of €1.2 billion of measure of which €905 million went to spending and €295 million went to net tax cuts.
- The Government has set a new medium term target of debt-to-GDP of 45%, a full 15 percentage points below that required by the EU fiscal rules.
What does it mean for business?
The State is now taking in significantly more than it is spending on day-to-day items. Like any business it has a continuous investment cycle. Ibec believes that while the balance on the current side is about right, given the risks in the economy, there is still much left to be desired when it comes to capital spending. The Government has, however, been hamstrung in this regard by the unfavourable treatment of investment under the EU fiscal rules. It remains to be seen how a contingency fund and debt to GDP target of 45% will be appropriate if infrastructural pressures continue to mount. On the mix of tax and spending the government has hit most of the expected targets focusing on quality of life issues such as childcare, housing and education in line with Ibec priorities while making incremental changes to the tax system which will help entrepreneurs.
When it comes to both tax and expenditure the budget has not fully appreciated the scale of the challenge presented by Brexit, with the recent sterling weakness coming as a late shock. Ibec has been outlining for some time that the current change in currency value is structural, not cyclical, and has occurred following fundamental changes to the economic and business environment domestically and in the UK. The likely damage in terms of reduced export volumes and job losses is significant. It is important that this is addressed over the next 60 days in the form of a more comprehensive set of Brexit focused policy responses.