Paschal Donohoe to cut tax despite warnings

Finance Minister Paschal Donohoe has said he still intends to cut taxes for middle-income earners despite warnings from economic bodies about the economy overheating.

Paschal Donohoe

He said Ireland remains in a strange position where someone earning the average wage remains on the higher rate of tax. He committed to continuing to tackle that anomaly, but only on a sustainable basis.

Announcing his summer economic statement, he revealed he is to forgo spending €900m in the upcoming budget allowed for under the EU fiscal rules. To spend that, he said, would be inappropriate given how strong the economy is growing.

This would increase the deficit by an additional 0.3% of gross domestic product (GDP) and would represent the “the wrong choice for the economy at this stage of the cycle”, he said.

The level of employment is close to its highest ever and we are approaching what could reasonably be called full employment,” he said.

Mr Donohoe said he was targeting a budgetary package of €3.4bn, which would result in a deficit of 0.1% of GDP next year. Some €2.6bn of this package has been pre-committed, he said.

This leaves €800m to allocate on budget day, he said, noting that any further taxation or expenditure measures would involve more borrowing and result in a further deterioration in the Government’s deficit position.

He said the amount spent on added services compared to tax cuts will remain on the 2:1 ratio agreed with Fianna Fáil. He also left open the possibility of raising other taxes to fund the income tax cuts, as he did in last year’s budget.

Using all the available fiscal space would, under the EU fiscal rules, allow for an additional €900m in the budget, said Mr Donohoe.

Speaking to reporters, Mr Donohoe said that while the economy is in good shape, he is not willing to pour fuel on the fire. He said he will be making sensible and prudent decisions in how public spending is increased.

Responding to questions from the Irish Examiner, Mr Donohoe said the spending increases are in line or below the rate of growth in the country.

The objective is to ensure the progressive and steady improvement of living standards and the further improvement in public services along with continued incremental and sustainable investment,” he said.

“This is a welcome development but as capacity constraints are increasingly becoming a feature of some sectors this, in turn, could lead to overheating of the economy.

“In this context, it is vital that Government policy does not add fuel to the fire but that we make sensible and prudent decisions now to secure our hard-won gains and ensure the continuation of sustainable future growth.”

As a means of taking some heat out of the economy, he confirmed that he will invest €500m into a so-called rainy day fund, adding that the large corporation tax will partially fund that investment.

“I will do nothing to overheat the economy,” he said.

Responding to the statement, Neil Gibson, chief economist, EY, said: “There is clear logic in spending less when the economy is strong, but as Ireland was not able to make large investments during the lean years, there is a rather long to-do list.

“This may necessitate a little more pro-cyclical spending than the Government (or economists) would like.”

Key points

The Government is targeting a deficit of 0.1% of GDP next year, or better, meaning a broadly balanced budget.

The budget package will be €3.4bn; Tax cuts for middle-income earners will be at its centre. However, €2.6bn has already been pre-committed to expenditure measures like a public service pay deal.

Finance Minister Paschal Donohoe will have €800m for new measures in Budget 2019. Using all the available ‘fiscal space’ would allow the allocation of an additional €900m.

However, this would increase the deficit by an additional 0.3% of GDP and would represent the wrong choice for the economy at this stage of the cycle, says Mr Donohoe.

It would also mean that we would miss our medium term objective (MTO) target for 2019 and that Ireland would be in breach of the fiscal rules.

Budgetary policy will seek to reduce borrowing, rebuild our fiscal buffers and support steady, sustainable increases in living standards to ensure we are protected into the future.


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