Government spending is set to increase sharply next year as billions are allocated to fight the pandemic and boost investment. Pre-budget figures show that Government officials now expect that the deficit next year will be €14.05 billion, before any budget day measures. This is below earlier expectations and leaves scope to plan for more spending next year, while still aiming for a deficit below the €21 billion expected this year. Tax revenues are forecast to rise by 5.7 per cent next year, driven by a rise in VAT as consumer spending recovers.
Budget 2021, to be announced on Tuesday by Minister for Finance, Paschal Donohoe and Minister for Public Spending, Michael McGrath, will include significant increases in ongoing Government day-to-day and investment spending. Core spending, before €16 billion in emergency Covid-19 measures, will be around €70 billion this year and is likely to rise by between €5 and €6 billion in 2021.
This will involve extra day-to-day spending on public pay, welfare and some other areas as well as a boost to investment spending by more than the €1 billion already indicated. In addition, a multi-billion recovery fund will include measures to boost the economy after the pandemic shock, including new spending on training, investment and ongoing business supports. A significant sum from the fund will not be allocated and will thus be available to respond to the pandemic next year and to Brexit.
The other part of Government spending this year was the €16 billion allocated directly to fight the pandemic. This was due to fall to about €8.5 billion next year, but some extra cash may be added here too. In total, Government spending next year may be just a couple of billion short of the €86 billion expected this year. The target deficit for next year may be in the €16 billion to €18 billion region.
However, the figures have been drawn up on the basis of no further increase in public health restrictions and it was made clear by the two Ministers at a press briefing on Friday that were this to happen, more borrowing would be needed. This could affect the figures for both 2020 and 2021.
Along with the core budget figures, the Minister for Finance said that a separate set of exchequer predictions would also be presented based on more pessimistic assumptions on the levels of restrictions needed to control the virus.
Specific measures
The new funds allocated for next year are expected to include specific measures for the worst-hit sectors, such as hospitality and events, as well as a general unallocated amount of money that could be used to extend wage or income supports from their current end date of spring next year, possibly in a more targeted fashion.
Beyond the Covid-19 package, and money set aside for Brexit – which the Government hopes might be topped up by EU funds – the budget is likely to bring limited changes. Documents published earlier this week showed that meeting the terms of the public sector pay deal, which ends this year, will cost €350 million extra next year. In total, when extra staff numbers are counted in, the pay bill may rise by close to €1 billion.
New tax-raising measures are likely in VRT changes and in the non-indexation of income tax bands and credits. Carbon tax will also rise. There is pressure also to reduce the VAT rate for the hospitality sector.
Pre-budget figures published in a White Paper by the Department of Finance on Saturday show an expected 5.7 per cent rise in tax revenue next year to €60.1 billion. This is before changes on budget day.
Corporation tax is expected to surge to €12.47 billion this year but rise only slightly to €12.89 billion in 2021. Income tax is forecast to rise from €21.5 billion to €22.7 billion as employment levels recovers slightly. A big rise is forecast in VAT from €12.8 billion this year to €14 billion next year in the hope that consumer spending recovers.
Elsewhere the low interest rate environment is expected to cut national debt servicing costs from €4.7 billion this year to €3.9 billion in 2021. However surplus income from the Central Bank, boosted in recent years from the sale of bonds related to the liquidation of the IBRC, will drop from €2 billion in 2020 to €429 million next year. The Republic’s contribution to the EU budget is expected to rise from €2.67 billion to €3.67 billion.
The White Paper shows that the €1.5 billion from the Rainy Day Fund, which the Government decided should be released to the exchequer, will count against borrowing this year.
