Tax revenues to rise even as economy cools

Finance Minister Paschal Donohoe.

Finance Minister Paschal Donohoe looks set to have ample room for spending rises and tax cuts in his next budget even as the Government cut the growth outlook.

The latest economic forecasts, which the Department of Finance releases in the Stability Programme as part of the regular cycle of budget forecasts prepared for the EU, show it cut its headline GDP growth projections for this year and in 2020 from previous forecasts in October’s budget.

GDP will grow this year and in 2020 by 3.9% and by 3.3%, down from growth rates of 4.2% and 3.6% projected in the October forecasts.

However, the forecasts reveal the Government still expects to take in more in tax revenues this year and next year than it anticipated six months ago despite the lower headline figures, as corporation tax receipts continue to swell.

The forecasts come as Central Bank governor Philip Lane stepped up warnings about the potential risks facing banks and Government finances.

The Department of Finance is now projecting it will collect tax revenue of over €58.4bn this year, up from over €57.9bn projected on budget day in October and forecasts it will have €500m more from corporation tax receipts in 2019 than anticipated.

And in planning for the next budget in October, it now projects it will collect tax revenue of more than €61.2bn in 2020, up from the revenue of €60.9bn forecast six months ago.

Austin Hughes, chief economist at KBC Bank Ireland, said the implied fiscal room for tax cuts and spending increases will likely be larger than even the new figures suggest and will become something of an embarrassment for the finance minister and his officials, who are trying to rein in budget spending expectations.

Mr Hughes said there a number of factors which are likely to boost Government finances, including the prospects for a much softer Brexit outcome than seemed possible only a few weeks ago, a more favourable exchange rate, as well as interest rates that have fallen significantly since October, which implies much lower finance charges on the national debt.

“The fiscal cookie jar” is probably opening up more than the Department of Finance would like, he said. Conall Mac Coille, chief economist at Davy, said that despite all the talk of prudence” the forecasts still show rapid growth in spending.

Minister Donohoe told reporters that the new forecasts assume an orderly Brexit come as tax revenues so far this year started positively and the exchequer expects to collect €500m more than anticipated in corporation tax receipts this year.

Gross debt next year will fall below the key 60% level next year as a share of GDP, but would still be an elevated level of 91% when measured by the modified measure of the economy.

Meanwhile, business group Ibec said it expects the economy to grow 4% this year.

“The Irish economy is in a sweet spot, with growth in employment and wages both hitting close to 3% in 2018,” said head of tax and fiscal policy Gerard Brady.

“The six months of additional time given to the Brexit process is welcome as it avoids an imminent cliff-edge situation. However, it has also left business to manage the rolling, and costly uncertainty,” he said.

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