How to avoid budget disappointment: Don't expect too much

How to avoid budget disappointment: Don't expect too much

Tuesday is budget day.

Rarely have expectations been so dampened down in advance of a budget statement.

The risks associated with Brexit have prompted a clear statement from the Minister of Finance that he will be preparing for the worst, and an equally clear statement from the Taoiseach that there can be no supplementary budget.

There will be one shot taken at this process.

When the economic consequences of the UK leaving the EU are discussed, the emphasis is quite rightly on trade flows and customs charges.

Because of the extent of our trade with the UK, Ireland is uniquely vulnerable when the UK comes to disassociating itself from the open trading and open border arrangements which currently prevail with our nearest neighbour.

Even in the context of the best possible deal between the UK and the EU, which despite the British announcements last week still seems a long way off, there will be a knock-on effect on employment in this country.

This is where the budget dilemma really lies. The currency of the Irish national budget is not trade – it is jobs.

About two thirds of the tax collected each year is directly related to employment. It comes principally from two sources – PAYE and VAT.

VAT is a tax mainly paid on the spend by individuals on goods or services in our economy.

If employment levels fall, the PAYE tax take falls and as a consequence because there is less disposable income available for consumers, the VAT take falls.

Because of the numbers of individuals involved, any change to income tax has dramatic exchequer effects.

A percentage point reduction in the standard rate of income tax - from 20% to 19% - would cost almost €700m.

That's almost half the projected price of the National Children's Hospital.

A percentage point reduction in USC from 4.5% to 3.5% would cost €422m. That's about the same amount as is collected in Local Property Tax every year.

Against such a backdrop, it is extremely unlikely that the Minister will tinker too much with the income tax system.

How to avoid budget disappointment: Don't expect too much

He will not want to reduce the capacity of the PAYE system, already challenged by the threat to jobs, by introducing additional income tax allowances and reliefs.

If not income tax, what about the old reliables? The price of a pint hasn’t been targeted for many years; 10c on the pint would bring in €68m.

The scope for additional yield from another old reliable, cigarettes, is severely limited because so much of the price of a pack is already made up of taxes and duties.

The latest estimates suggest that a 50c raise per pack of 20 might even be counter-productive, and actually cost money.

Further cigarette price increases hopefully have the effect of reducing the number of people smoking, but also have the effect of making cigarette smuggling more attractive.

Elsewhere, 5c on a litre of petrol yields €45m; 5c on a litre of diesel yields €137m. Increases in the cost of fuel are inevitable, if carbon taxes are to be increased.

In fact, increases rather than decreases may well be the order of the day in the context of Brexit.

How to avoid budget disappointment: Don't expect too much

Every time a worker on the average wage loses his or her job, that is not only tragic for the individual and indeed the business concerned, but it also costs the State just over €20,000 per annum.

That's because of the loss of tax yield, coupled with the additional social welfare benefit involved.

Given that the gloomiest of Brexit projections suggest up to 50,000 job losses - though some jobs lost will be replaced by others - on the face of it that means an additional exchequer charge of anything up to €1bn.

In short, don't expect too much on Tuesday and you won’t be disappointed. Budget 2020 is about the least worst option.

The only saving grace is that this time, it won't have been our fault.

Dr Brian Keegan is director of public policy at Chartered Accountants Ireland.

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