Economic context and fiscal space

The upcoming budget will be introduced in the shadow of a UK political decision which will have significant implications for Ireland and Europe over the medium to long term. Exchange rate volatility aside, as of now, little has changed in the Ireland-UK trading relationship. This year Ireland’s economy will still perform strongly on the back of the very positive first half of the year. We expect growth to remain in excess of 4% during 2016.

Expectations of a slowdown have emerged in the UK as businesses and consumers re-evaluate their position. While this means that the outlook for 2017 is now considerably more uncertain, it is still too early to tell what the full effect of Brexit will be, either domestically or internationally. This depends as much on the ability of the political system in the UK to engender confidence in consumers and business over the coming months as on any external factor.

Ireland is in a better position to weather the uncertainty of Brexit now than it has been over previous years. Our fiscal position has improved rapidly with debt ratios now reaching developed world norms and the State reaching a primary fiscal surplus in 2015. Given that the average interest rate on our outstanding government debt (3%) is lower than expected nominal growth rates of GDP, both the debt ratio and the relative cost of debt servicing should fall significantly over the coming years.

In a post EU Fiscal Compact world, limits on spending and tax decisions will be much more explicit and binding than in the past. This means that much more strategic choices have to be made in the future in relation to resource allocation. Ibec’s budget submission takes the view that in the current economic climate these resources are best focused on strategic priorities which expand the productive capacity of the economy – capital investment, housing, tax reform, education and innovation. This does not mean social goals must lose out. In many cases outlined in this submission – including capital investment, housing, education, training, childcare, share options and innovation – the two are aligned.

In its most recent Summer Economic Statement, the Government presented a gross fiscal space of €1.8 billion in 2017. This means that in nominal terms, government spending or tax cuts can amount in total to €1.8 billion in the absence of offsetting measures. From this the Department of Finance estimates that the State will need to spend almost €400 million to allow for demographic pressures in health, education and pensions – a further €300 million has been committed to public sector pay under the Lansdowne Road agreement. While at the time of writing the Department of Finance has confirmed the 2017 fiscal space will remain unaffected by Brexit, its impact on future years will be far more uncertain.

The Fiscal Advisory Council (IFAC) has reviewed this estimate and noted a number of things – not least that the estimates assumed no price push inflation in public sector spend or welfare payments, that it left no allowance for a successor to the Lansdowne Road Agreement post 2018 and that forecast demographic and spending pressure estimates are short of what will be needed to keep up with population pressure. IFAC estimates that around €10 billion of the total 2017 to 2021 fiscal resources of over €14.7 billion will be taken up by non-policy related spending pressure. This was a near €6 billion higher than the Department of Finance estimate of €4.5 billion.

Neither estimate takes into account indexation of the personal tax system – without which we face tax increases in real terms. For the personal tax system this would cost in the region of another €2 billion between 2017 and 2021. In total, keeping the tax and spending system at a standstill would cost up to 80% of the available additional resources over the coming years with the remainder left for tax measures or spending increases. In short, money will be tight. As such, a number of our priorities in this submission strive to either provide targeted solutions to pressing issues or to use existing resources in a more effective manner.

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