Prudence before popularity

Nov 05, 2019
Neil Gibson, Chief Economist at EY Ireland, explains why giveaway budgets are no longer the reward for Ireland’s economic success.

This year’s Budget announcement was a clear indication that, despite the country’s positive economic position, the budgets of old – punctuated by tax cuts and giveaways – have likely been consigned to the history books. Instead, the focus is firmly on public service delivery, targeted and time-limited supports and risk mitigation.

No-deal now the base case

The first 15 minutes of Minister Donohoe’s speech was dedicated to dealing with a no-deal Brexit, indicating how significant the Government expected the impact to be. The base case for the economic forecasts is now a ‘no-deal’ outcome, growth is expected to fall from 5.5% this year to just 0.7% in 2020. The intent to provide funding to mitigate adverse Brexit effects was prudent, but its effectiveness will be determined by how quickly and effectually this is deployed.

In the event of a no-deal outcome, some businesses will need very rapid support to solve cash-flow challenges but there can be no expectation that this will become a long-term source of support. The money must be used to buy time and then help firms to adapt to the new trading conditions, assuming no-deal conditions persist. There will need to be flexibility in the deployment of support, and it was slightly surprising how detailed the commitments were to different schemes and departments. Amazingly, at the time of writing, it remains unclear what form of deal, if any, will be struck.

Time to adjust Budget expectations

To get a sense of the room, we surveyed attendees at our EY Budget event and it seems Budget 2020 may have fallen short of expectations more broadly, with the majority of respondents saying they felt ‘exactly the same as before’ while 19% felt ‘disappointed’, 16% felt ‘reassured’, 3% felt ‘worried’. Nobody felt ‘inspired’.

Budget analysis often focuses on the individual. Who is better or worse off, and by how much? Understandable, but there is growing recognition that money is not the only barometer of success. What of our healthcare and education systems? Our safety and, increasingly, what of the health of our planet? We are being asked to think less inwardly – to look at the bigger picture, the community and the world around us.

This was never going to be a giveaway budget. Minister Donohoe, correctly, pointed to the risks facing the Irish economy and the fact that, even after five years of impressive growth, the economy is only just balancing the books. Looking at the infrastructure and public policy needs and the challenge of tackling climate change, it is fair to say that the era of widespread tax cuts and giveaways is long gone.

Now, the public faces into a potential era of tax increases as further tax receipts will be required to fund public expenditure. The carbon tax announcement, for example, demonstrates how the linking of tax to beneficial spending plans could become more common. The ring-fencing of tax receipts to resolve specific economic or societal questions can often be easier for people to accept and tougher for businesses to argue with. Supporting that, 74% of business-people surveyed feel the €6 carbon tax increase per tonne does not go far enough, according to the EY Budget poll. Ring-fencing may be more electorally palatable, but it runs the risk of creating a very fragmented tax and expenditure system. It can also reduce the flexibility needed to adjust to unforeseen circumstances.

Caution required

The cautious and restrained Budget 2020 may seem at odds with an economy that is one of the world’s fastest-growing developed economies and more than 50% larger in GNP terms than it was five years ago. But Minister Donohoe, as expected, highlighted the twin threats of a global slowdown and Brexit as reasons to avoid any sweeping giveaways. Most economists would approve of this restraint at the peak of the cycle, regardless of the reasons, though it is worth remembering that economists usually do not run for election.

The reality is that, despite Ireland’s well-documented growth, it is just about balancing the books and with a net debt of close to €180 billion, there is very little capacity to deal with future slowdowns. If Ireland cannot pay off debt at the peak of the cycle, what does that tell us about its economic foundations?

Public expenditure has risen strongly in line with tax revenue, despite the messages of restraint and welfare savings, as the labour market has improved. Our growing population, the legacy of underinvestment in infrastructure, well-documented shortfalls in health spending and a rising recognition of education’s relative spending deficit lessens the Minister’s ability to adhere to so-called ‘counter-cyclical’ economic policy (i.e. spending less money when the economy is growing rapidly and more money in a time of slow growth).

The harsh reality is that more tax will be required, or a renewed effort will be necessary to find efficiencies in what Ireland currently spends. Neither option will be popular, and this is before we tackle the climate change and emissions crisis. Perhaps the cautious and restrained tone is therefore justified – giveaways will not be the reward for Ireland’s success.