Minister for Finance Paschal Donohoe has signalled a tough approach to future spending increases as strong economic growth spurs expectations among Ministers of a pre-election giveaway budget this autumn.
Mr Donohoe yesterday published revised economic forecasts. The outlook indicated that the economy would grow at a stronger rate this year and next than the Department of Finance had previously estimated.
However, Mr Donohoe stressed that his room for manoeuvre on spending increases and tax cuts would be constrained given the high level of previously agreed commitments.
Sources familiar with thinking in finance warned of “extraordinary” spending demands from other departments with pressures on public sector pay, especially for teachers and nurses, growing later this year.
Mr Donohoe would not be drawn on budget measures but indicated that there will be little scope for substantial tax cuts or new spending increases unless additional revenue-raising measures are introduced.
The Government is earmarking an additional €2.6 billion in spending for budget 2019. The figure was noted in its latest Stability Programme Update (SPU), to be submitted to the European Commission later this month. But that sum is likely to be increased on budget day.
Of this, €1.1 billion will be almost entirely taken up by the carry-over costs associated with the previous budget, demographic-related costs and the latest public sector pay deal, said the department.
The balance of €1.5 million will be allocated to capital spending increases for housing, health and education set out in the National Development Plan.
This investment will ensure a sustained increase in social housing delivery, new transport infrastructure, along with additional school infrastructure and the delivery of the new National Children’s Hospital, said the department.
In terms of additional revenue-raising measures, Mr Donohoe has flagged plans to make changes to the Local Property Tax which is calculated on 2013 values. But any changes will be modest and are not expected to affect homeowners until 2020.
The department is now predicting economic growth of 5.6 per cent this year and 4 per cent in 2019 on the back of positive trends in exports and domestic demand.
It had previously predicted the economy would expand by 3.5 per cent in 2018 and 3.2 per cent in 2019. The department cautioned, however, that part of the upgrade was driven by statistical distortions emanating from the multinational sector.
Nonetheless, the department said increased growth would mean employment rising above the pre-crisis peak of 2.24 million in the first half of this year. Mr Donohoe said this was “a sure sign of the distance we have travelled”.
While the economic forecast outlined in the update is extremely positive, the department warned of several downside risks to growth. These include Brexit, changes to the global corporation tax landscape and the possibility of a trade war between the US and China.
Projections for domestic growth are also based on a pre-Brexit transition period, which would mean the United Kingdom remains inside the EU until 2020.
“The short-term outlook for our economy, as set out by the SPU, is positive and this is delivering gains where it really matters in the labour market,” said Mr Donohoe. “It is now my expectation that later on this year we’ll have more people at work in Ireland than we’ve ever had before in our history. Our challenge will be to combine that employment growth with real and sustained and affordable growth in real wages.”
