State may rein in 2018 spend to stave off another bubble

The Government may not spend all available money next year for fear of overheating the economy, the Taoiseach has said.

Leo Varadkar has admitted that if the economy continues to grow at the current rate, he would have to consider not spending all the resources available in a bid to stave off another bubble.

His comments mark a significant point for the country, having come out of an EU-IMF bailout and recession.

Mr Varadkar said he is adamant that the Government will not repeat the mistakes of the past and any increases will be focused on services and infrastructure.

One third or less of available funds will go on tax reductions and reliefs.

Mr Varadkar said: “There is a risk, as is always the case for a growing economy with low unemployment, of repeating the mistakes of the past and actually making government decisions that could overheat the economy.

“We know that if we increase capital spending too quickly, even though we all want more hospitals, schools and houses, all you do is drive construction inflation and you end up getting the same number of schools but you pay more.

“We also know that there are risks, in terms of competitiveness, if we let pay grow too fast and potentially becoming less attractive to employment into the future. We are going to have to balance those things.”

He said it would not be prudent to spend a money “just because there is a certain amount” available.

Mr Varadkar said it is “not certain” that there will be €1bn of tax cuts next year but added that the focus will be similar to October’s budget with an emphasis on “people on very modest incomes or middle incomes pay the higher rate of tax”.

“Taxes can be about two things — putting money back in peoples’ pockets, which we want to do — but they can also be about reform and I think that is one area where it is not just about giving people money back, it’s about structural reform.

“People hit the higher rate of tax much earlier than they do in other countries and that is a problem in itself because employers do have to factor that into their decisions.”

Budget 2018, delivered by Finance Minister Paschal Donohoe last October, was technically the first balanced budget since the recession hit in 2007.

The Taoiseach noted that economic growth is “ahead of expectations”.

The European Commission has predicted that Ireland’s GDP growth will remain “robust” all the way up to 2019.

However, the pace of growth will moderate slightly in the coming years.

The commission expects overall Irish GDP growth of 4.8% for this year and has forecast that this will slow to 3.9% in 2018 and 3.1% in 2019.

Mr Varadkar added that unemployment is about 6% and long-term unemployment (people out of work for more than a year) is down at around 3%.

“The national debt is also falling and we have indicated our intention to pay off our loans to the IMF early and that is also in train,” he said.

“The first priority for next year is to keep the economy on track and manage the public finances prudently. We’ll avoid overheating in the economy and continue to reduce the debt, not just public debt but also observing a reduction in personal and household debt.”

The Government also intends to establish a rainy-day fund in 2018 which will be kick-started with a €1.5bn injection.

A further €500m will be added in 2019 and 2020. Mr Varadkar said this fund is designed to be “a buffer to insulate us from any future shocks that may occur”.