The scope to deliver tax cuts and spending increases in October’s budget will be highly restricted even though strong economic growth is set to continue, the Government will say in its summer economic statement on Wednesday.
Senior figures suggested on Tuesday night that spending constraints will loosen before October’s budget, but as it stands the fiscal space, or the scope for new spending and tax reductions, will be set at €1.2 billion.
When the cost of changes announced in last year’s budget but not fully implemented is taken into account, that figure reduces to just in excess of €500 million.
However, the cost of public sector pay increases under the recently-agreed extension to the Lansdowne Road Agreement is €200 million a year - meaning that the amount remaining for tax cuts and spending increases is actually only €300 million.
Few Ministers believe this figure is politically sustainable and they expect the money to work with in the budget to rise before October.
The statement will maintain the upbeat projections for the Irish economy and say that it will grow by 4.3 per cent this year, with 55,000 new jobs added. It will forecast a slower growth rate of some 3.75 per cent for next year.
The statement will include a commitment to balance the Government books next year, ending borrowing for current spending.
This would mean the Government would achieve the European benchmark known as the Medium-Term Budgetary Objective (MTO), with the budget deficit coming in at less than half of a per cent of GDP.
The Government believes that once this is achieved, continued economic growth will create greater space for tax cuts and public spending.
Capital spending
Plans for increased capital spending - a theme focused on by Taoiseach Leo Varadkar during the Fine Gael leadership election - are also likely to be elaborated on in the statement.
The Government is likely to divert resources previously intended for a “rainy-day fund” into a capital spending plan over the coming years, though the idea of the fund will not be completely abandoned.
The fund was announced last year by former minister for finance Michael Noonan to guard against future economic shocks, such as Brexit.
However, Mr Varadkar and Minister for Finance Paschal Donohoe believe there is a pressing need for an injection of capital spending in the near future.
The summer economic statement will be the first of a number of declarations on the subject ahead of the scheduled announcement in the winter of a 10-year capital-investment programme.
Wednesday’s statement will also set out the five key themes of the Government’s economic strategy.
These are “sound and sustainable public finances”;“managing public expenditure to ensure maximum return on taxpayer resources”;“targeted increases in public capital investment”; “reforming the taxation system to ensure it is growth-friendly”, and “ensuring balanced regional growth and facilitating access to finance, especially for SMEs”.
