Covid uncertainty leaves little scope for Budget 2021 giveaways

Slowly the pieces for Budget 2021 are starting to fall into place. So what have we learned from the latest exchequer returns for September?

The first key point is that tax revenues are well ahead of the target set in April, when the estimates were recalculated in the light of Covid-19. The overshoot is more than €7 billion, or 21.6 per cent.

Income tax is almost €2.5 billion ahead of expectations. It is more than 2 per cent down on last year, but a much bigger drop had been anticipated.

The strong performance of some sectors employing higher paid people and the fact that those losing jobs were predominantly lower paid, with small or no income tax liabilities explains this. Still, monthly returns are now running well below 2019 levels and estimating income tax for next year will be tricky.

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Corporation tax receipts, meanwhile, are 47 per cent or €2.36 billion ahead of April expectations and are well ahead of 2019. The outlook here remains unpredictable, but the buoyancy is a big boost this year with such pressure on spending.

Deficit

With taxes of €39.6 billion coming in ahead of expectations, and just 3 per cent down on 2019 in total, the deficit for 2020 looks likely to come in well below the previous worst-case forecast of €30 billion. A figure closer to €20 billion now looks likely.

In turn, this may give a bit more leeway for the budget next year, though this is within the context of a likely 2021 deficit target of around 5 per cent of GDP before a ball is kicked on budget day.

Covid-19 pressures have helped to push Government spending up by €9.6 billion, or 25 per cent this year so far compared with 2019, a massive increase driven by additional health spending and income and wage supports.

Minister for Public Expenditure Michael McGrath has allocated €9 billion to Covid-19 measures next year – a figure which might rise given the pressure on unemployment and the consequent need for jobs market interventions. Health spending also remains under pressure. This will leave relatively little for other new spending measures – a figure of €900 million has been indicated by McGrath for additional current spending.

The tricky job facing McGrath and Minister for Finance Paschal Donohoe is working out how the 2020 tax and spending trends translate into 2021.

Economic growth estimates have been cut for 2021 due to the ongoing pandemic and the assumption of no trade deal in Brexit negotiations. This will have some impact on tax revenues – and meanwhile spending will remain under pressure, particularly if income and wage supports need to be extended past the spring, or new sectoral measures are needed.

So while lower borrowing than expected this year will probably leave a bit more leeway next year than anticipated, the slow growth rate next year and high unemployment will put a lot of demands on spending.

Beyond dealing with the massive Covid-19 bills and keeping investment spending going on areas such as housing and the environment, there will not be a lot of cash left for other measures.