Ireland's budget deficits shaping up to be 'much better than once feared'

Ireland's budget deficits shaping up to be 'much better than once feared'

Minister for Finance Paschal Donohoe confirmed there will be no changes to income taxes in next month’s budget. Picture: Gareth Chaney

The budget deficits this year and in 2021 are shaping up to be much better than once feared, despite the twin threats of Covid-19 and a crash-out Brexit, a senior economist has said.

The comments come after Finance Minister Paschal Donohoe said that October’s budget is being prepared on the basis of a deficit next year of between €15bn and €19bn, equivalent to a deficit of between 4.5% to 5.5% of economic output, and before any further fiscal decisions are taken on budget day itself.

For this year, spending will amount to €86bn, up by €16bn on the estimates before the onset of the Covid-19 crisis in March.

The budget arithmetic is based on the assumption that the Covid-19 economic crisis will extend long into next year and that Britain will crash out of the EU with no trade deal at the end of December.

However, Conall Mac Coille, chief economist at broker Davy, said the new estimates suggest the deficits will be much smaller than once feared and that Ireland was shaping up to post some of the lowest budget gaps in Europe, as tax revenues stand up much better than expected to the crisis.

Davy forecasts a budget deficit of under €23bn this year, or 6.3% of GDP, which is well below the upper ceiling of €30bn forecast by the Government in the early weeks of the pandemic. For next year, the broker sees a deficit of €16.4bn.       

Mr Mac Coille said the better budget outcomes give some comfort to the Government should economic conditions deteriorate again. 

Mr Donohoe confirmed there will be no changes to income taxes in next month’s budget but that the Government would repeat the change in last year’s budget in carbon taxes and will reinvest the proceeds, as well as protecting people who would be worse hit by the taxes. The Government had taken no decision on core welfare rates, he said.

The risks of a no-deal Brexit had increased in recent days since the UK published its internal market legislation, Mr Donohoe said. Nonetheless, the economy had the strength to deal with the Brexit fallout even though the consequences were significant, he said.

Expenditure Minister Michael McGrath said the budget takes into account the likelihood the Covid-19 emergency will extend into next year and was based on a no-deal Brexit.

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