Jim Power: Budget must reflect caution and conservatism, not populist heroics

When the finance minister stands up next Tuesday to deliver Budget 2017 — along with his colleague, the minister for public expenditure and reform — he will do so against the most favourable economic and fiscal backdrop in a number of years.

Notwithstanding this fact, it is also probably true to say that they will present the budget against a background of intense uncertainty and challenge.

Brexit, ongoing sterling weakness, the Apple tax ruling, growing unrest amongst some militant unions, and the strange complexion of the Dáil and the Government, immediately spring to mind. All of these issues should give deep cause for concern.

On the economic front, we got further good news this week. Unemployment in September fell to 172,900 and the unemployment rate declined to 7.9% of the labour force. The number of jobless has declined by 61,200 over the past two years.

The exchequer returns for the first nine months of the year show that an exchequer deficit of €25m was recorded, down from €104m in the same period last year. Tax revenues came in €484m ahead of expectations.

Corporation tax was €644m ahead. It’s unclear if the surge in corporation tax since the beginning of last year is sustainable or is just an ongoing adjustment. Worryingly, income tax is running €114m behind and Vat €278m behind.

Of more significance is the fact that in the first nine months, income tax was €509m higher than the equivalent period last year and Vat receipts were €490m higher.

The public finances are in fine fettle and set a positive backdrop to Budget 2017, but caution should be the guiding principle in framing the budget and in the general management of the economy.

Any possibility that the UK might somehow row back from the Brexit vote has faded. Prime Minister Therese May has stated, on numerous occasions, “Brexit means Brexit’, and last weekend she committed to invoking Article 50 in March 2017.

It will take a lot longer to provide solutions to address the numerous issues that will have to be addressed.

The biggest question is, of course, the nature of the trading relationship that the UK will have with the EU post-exit. Soft-Brexit would describe a situation where the UK would have access to the EU market and would make some contribution to the EU budget and accept many of the terms and conditions of the market, particularly the free movement of people.

This would be politically problematical, as the vote in June was heavily influenced by the desire to protect its borders from inward migration.

Hard-Brexit would mean a situation where the UK would not be part of the EU’s customs union and trade between the UK and the EU would be subject to trade barriers such as tariffs and quotas.

The EU is the UK’s biggest trading partner for a number of reasons, but proximity is the most important. Geography tends to be the biggest driver of trade.

Recent rhetoric would appear to suggest that the odds are now favouring a hard Brexit. In such an eventuality, Ireland’s trade with the UK would come under pressure and it is hard to see how a soft border with the North could survive.

These are longer-term issues; the immediate issue is the descent of sterling. Budget 2017 must be characterised by caution and conservatism. It is not the time for populist heroics.