Government to frame Budget on basis of no-deal Brexit

The Government will frame next month's Budget on the basis of a no-deal Brexit and will not bring in any major taxation increases, Minister for Finance Paschal Donohoe has confirmed.

At a briefing outlining the strategy behind next month's Budget, Mr Donohoe said Budget 2021 will focus on providing further fiscal support to the coronavirus-hit economy.

He said the Cabinet had agreed that broad-based increases in taxation would be counter-productive at this stage and there would be no change to income tax credits or bands, USC or PRSI.

“There is a heightened air of economic uncertainty and this Government wants to give confidence to those who are earning income or who have a high level of deposits within our economy for this year and for next year,” he said.

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Minister for Public Expenditure Micheal McGrath, however, declined to rule out changes to pension and welfare rates.

Both ministers confirmed that the Budget would be based on the assumption that a free trade agreement between the EU and the UK would not be agreed before the end of the year and that from the beginning of next year bilateral trade between the two would be on World Trade Organisation (WTO) terms.

This could result in the imposition of tariffs on Irish exports to the UK with the food and drink sector here particularly exposed.

The Central Bank predicts the economy here could contract by 2 per cent in the event of a no-deal Brexit. It is not clear if this impact will be amplified by a resurgence in Covid-19 cases.

The UK has thrown the Brexit talks into disarray by proposing legislation that effectively breaches parts of the Withdrawal Agreement which it signed in January.

Mr Donohoe said the likelihood of a no-deal Brexit had heightened in recent days and the safe thing to do was to prepare for the consequences.

The other major assumption underpinning Budget 2021 would be “that , in the absence of a vaccine, the economy – and broader society – must co-exist with the virus,” they said.

“Normal budgetary adjustments” had to give way to the State’s response to the Covid-19 crisis but that the package of measures to be announced would endeavour to maintain existing levels of public services, they said.

As per the Programme for Government, the sectoral priorities would be health, housing and climate change.

A recovery fund is also to be established to allow the State respond to issues that arising in 2021, but no decision on its scale has been made.

Mr Donohoe said the Government was expecting to run a budget deficit of 4.5-5.5 per cent of gross domestic product (GDP) next year, which included substantial Covid-related expenditure.

“ This equates to ‘cash’ borrowing in the region €15-€19 billion for next year,” he said, while noting additional policy decisions - to be announced on Budget day - would add to this.

The Government is expected to run a budget deficit this year of about €30 billion as a result of lost tax revenue and increased spending on pandemic-related wage supports and heath.

“Our objective is to ensure that the overall deficit is in line with that of our European neighbours,” he said.