Budget demands are virtually infinite but resources are sadly scarce

With just days to go to Budget 2018, media and others are ramping up for the theatre that is the annual statement of fiscal policy, writes Jim Power.

Many trees will be wasted over the coming days as commentators debate. A lot of
pixels will be used in the online world. In the three days following the event, I will have budget presentations in Dublin, Cork, Kilkenny, Waterford, Meath and Galway twice. A lot of diesel will be wasted and my carbon footprint will go through the roof.

This year is no different than any other. While the timing of the budget has moved over the years, the level of media and public interest has always been intense. One wonders why, particularly in the fiscal environment in which we now operate.

The annual budget is basically a statement of fiscal policy, or in other words what the Government intends to raise in revenues over the coming year and how it intends to raise it; and how much it intends to spend and how it spends it. As such, it is important, but on budget day itself, the minister for finance will only be in a position to announce very meagre changes.

Due to the fact that Ireland is now so heavily constrained by the EU in terms of how it runs its fiscal policy, the scope of doing anything meaningful is limited in the extreme. The most recent analysis from the Irish Fiscal Advisory Council suggested the minister will have an extra €1.7bn at his disposal on budget day, assuming he sticks to his expenditure commitments as laid down by the EU.

Of this €1.7bn, previously announced measures will use up around €1.2bn. This means that on budget day next Tuesday, the minister will have around €500m to play with, which in the context of the magnitude of overall expenditure and revenues, is a tiny amount of money. He could, of course, enhance this scope by announcing additional tax increases or reallocation of existing spending. Either way, when we wake up next Wednesday morning, most of us will be very slightly better off, but not significantly so.

The last set of exchequer returns before the budget was published this week.

They show that the public finances remain in good health, with tax revenues running €1.8bn ahead of last year. Much will be made about the fact that tax revenues are running €212m behind target in the first nine months. This is equivalent to just 0.6% of total taxes collected and is pretty inconsequential.

The buoyancy of tax revenues is reflecting the buoyancy of the economy.

If the economy is growing, then tax revenues will be generated, and vice-versa. The priority for the minister must be to ensure that he does nothing that might damage activity of the economy. In this regard, I hope he does not increase the Vat rate for the hospitality sector, which is making a significant contribution to employment growth, tourism activity, and tax revenues.

Furthermore, I think that the potential employment opportunities posed by Brexit should encourage him to relieve the tax burden on workers. Specifically, I would like to see the income threshold at which one ends up paying the top marginal rate of tax lifted by a couple of thousand euro. On the expenditure side, the demands are virtually infinite, but resources are sadly scarce.

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