Minister for Finance Paschal Donohoe has played down the prospect of a giveaway budget this year, warning that loose spending would overheat the already fast-growing economy.
Appearing before the Oireachtas Committee on Budgetary Oversight following the publication of the Government's latest Stability Programme Update (SPU), Mr Donohoe said recovery had outperformed even the most optimistic expectations, but this had brought with it a different set of challenges.
“If the economy continues to grow in excess of its potential, capacity constraints will begin to emerge. In these circumstances it is essential that budgetary policy does not contribute to overheating, and that the pro-cyclical policies of the past are not repeated.”
In its latest update the Government said it had allocated an additional €2.6 billion in spending for budget 201, even though previous department reports have signalled fiscal space of €3.2 billion for 2019.
The department also upgraded its economic growth forecast for 2018 by nearly two percentage points to 5.6 per cent on foot of a sharper-than-expected pick-up in exports and domestic demand at the end of last year and the beginning of this year.Nonetheless, Mr Donohoe cautioned there were significant downside risks to the forecasts from Brexit, changes to the global tax environment and a trade war between the US and China.
Several TDs questioned the Minister about a report from the International Monetary Fund (IMF) which suggested that exports of Apple’s iPhone products accounted for one quarter of Ireland’s 7.8 per cent growth last year.
Mr Donohoe acknowledged that “contract manufacturing”, where multinationals here contract firms abroad to manufacture on their behalf with the resulting output included in Irish exports, was exaggerating economic growth here by 1.5per cent to 2 per cent.
Nonetheless he said headline growth was not a measure he consulted when forecasting tax revenue or formulating tax policy.
“That’s why I’m not saying we should have increased Government expenditure last year by 7 or 8 per cent because that’s not how our real economy grew.”
Mr Donohoe highlighted Brexit as the chief uncertainty facing Ireland. The Government's forecasts assume a two-year transition following the UK's exit next year and some kind of free trade deal being forged between the EU and the UK after that.
However, he cautioned the risks associated with Brexit would probably not materialise until later this year after the European Council meets in October, and said he was not ruling out the prospect of having to revise his current set of assumptions.
“Many of the things that are going to have an effect on how our economy is going to perform – they will begin to crystallise towards the end of this year. And I think there will be things that will happen in the UK that will affect the British economy, and in turn that could have a spillover effect that could potentially be beyond what we’re considering at the moment.”
Mr Donohoe was criticised by People Before Profit TD Richard Boyd Barrett for failing to take into account the likely fines facing Ireland in 2020 for breaching its various climate targets in his budgetary arithmetic.
The Minister said he would furnish the committee with estimates of the fines at a later date.
