Brexit will sour Paschal Donohoe’s ‘jam tomorrow’ tax cut plans

Taoiseach Leo Varadkar and Minister for Finance Paschal Donohoe are going to present a three-year programme for public finances in the Budget. It will help businesses and the public plan, the Taoiseach said. Hard to argue with that - and if it is a move away from the long and dishonourable traditional of trying to cook up some surprises on Budget day each year, then all the better.

But there may be another motivation for the three-year strategy this year. It will allow the Government to promise some juicy enough tax cuts and spending increases in the latter two years. There isn’t a lot of cash available this year, but - on current projections - there will be for the 2019 and 2020 Budgets.

Politically, the Government is hoping that this “jam tomorrow” strategy will keep voters on board.

On current projections there might only be €300 million to distribute in new tax and spending measures in Budget 2018, which will be presented in October. You would suspect that a bit more will be found from somewhere before the day itself, but either way the package will be tight enough.

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The Government will have to find savings or some increased taxes to pay for any significant new measures - and in the current political set-up that won't be easily achieved. You can just see all the big lobby groups playing Fine Gael, the Independents and Fianna Fáil off against each other.

Just watch the tourism lobby in action if there is any talk of increasing the 9 per cent Vat rate, for example.

Room for manoeuvre

Caught in a bind for Budget 2018, the Government wants to hold out the promise of more in the years ahead. The forecasts are that the room for manoeuvre in Budget 2019 will be €3.2 billion, with €3.4 billion available the following year.

Happy days, you might think, for the Minister for Finance who gets to present those Budgets. It might not quite be back to the “Champagne Charlie” headlines of the McCreevy era of the early 2000s, but “ Prosecco Paschal” would, if the forecasts prove correct, have a significant enough amount to play with.

Even on the Government commitment to use two-thirds of any leeway for extra spending and one-third for tax reductions, this would still leave some room to take a chunk out of USC or income tax over a couple of years and promise some extra spending in key areas.

Of course the key phrase in all this is “on current projections”. We have seen how Budget prospects can turn on the proverbial sixpence, if economic growth turns downwards. Revenues and spending are both very large numbers each year - both in excess of €60 billion.

High reliance

All you need is for tax to come in a bit below expectations and spending a bit above and your projections are in trouble. Our high reliance on corporation tax and our limited understanding of what is driving this revenue are other risk factors.

And then, of course, there is the obvious point. Brexit happens five months after Budget 2019 is announced. You would presume by then we will know more about the shape it will take, though on the speed the talks have been moving at so far, you wouldn’t be at all sure of that.

If Britain is heading for a hard Brexit and particularly if it looks like it might crash out of the EU with no deal, then we will be seeing some economic nerves by next year and will face considerable uncertainty heading into 2019. Your guess about how likely this is will be as good as mine, but it can’t be ignored.

If the three-year Budget plan is to mean anything, it needs to confront this head on. There is little point in promising people income tax or USC cuts in 2019 and 2020 as a matter of certainty, if the numbers are built on a foundation of uncertainty. This is no fault of those who made the forecasts, of course - it is just the situation we find ourselves in.

Flexibility

Against this backdrop, if the Budget is really to prepare us for Brexit, it needs first to make clear that nothing will be done to throw the public finances off course. Above all, we need some room for flexibility in the public finances if the immediate Brexit hit to growth is more significant than currently forecast.

Beyond that, the Budget plan then needs to set priorities. Top of the list needs to be key pieces of social and economic infrastructure - housing, investment in water and some other key projects. Then there are a hundred and one other demands for day-to-day spending and tax cuts.

There are key problems in the tax code which need to be fixed . One of them is the low income level at which people enter the top tax rate. Another is the need to decide on the future of property tax, which can be a long-term stable source of revenue, but needs to be structured correctly.

But I wonder are taxes now the top priority of voters? Asked in surveys do we want to pay lower taxes, we will all say “yes”.

But where does this really rank against priorities such as housing, health and education?

If the Government uses the three-year plan to pursue a “jam tomorrow” tax cut plan, it will have little credibility against the backdrop of Brexit. A proper plan needs to recognise the huge uncertainty that this presents, and set down a considered way to respond. Promising a point off the main USC rate each year does not constitute a strategy.