Paschal Donohoe faced with wall of unrealistic budget demands

Paschal Donohoe must deliver a budget singlehandedly for the first time with little or no money to give out. Yet, an endless stream of expectation lurks from every corner, writes Daniel McConnell.

IT WAS early Thursday afternoon and I bumped into Minister Michael Darcy outside the Dáil chamber.

A mass exodus had begun as the tributes to former taoiseach Liam Cosgrave had just concluded.

Following Darcy was the man of the moment, Finance Minister Paschal Donohoe — the man whose endlessly cheery disposition has surely been tested could barely walk five feet without colleagues and journalists seeking a word.

Colleagues seeking to plead their case for favourable treatment on Tuesday; journalists like myself seeking some nugget of news to reveal to our readers.

But he made his way over to where I and Darcy, his junior finance minister, were standing.

Just then, amid a wave of TDs two of Donohoe’s Fine Gael Cabinet colleagues, Heather Humphreys and Michael Ring passed by in deep discussion.

“Hello, my colleagues,” went Donohoe in his normally generous manner.

While there were smiles and pleasantries exchanged with Donohoe, the body language was not warm and their expressions were strained.

When they were about 10ft past the finance minister, in a bid to lighten the mood, Donohoe bellowed out: “There may be no money, but we have our cheer.”

It was an honest attempt to soften their mood but it was clear it did not land well with Ring and Humphreys, who clearly were feeling short-changed from their discussions.

They continued on in deep discussion as they headed for the restaurant but it was a vivid indication of how thankless Donohoe’s job is.

He must deliver a budget singlehandedly for the first time with little or no money to give out.

Yet, an endless stream of expectation lurks from every corner.

Clearly the task is weighing on him as he looked like he needs a good sleep.

Thankfully, we are just three short days away from the budget and the nonsense can come to an end.

But come Tuesday evening, Donohoe is likely to be unpopular with some if not all of his elected colleagues.

The demands on him are unrealistic. His party leader and Taoiseach is demanding tax cuts while Fianna Fáil are demanding he sticks to the Confidence and Supply deal and cut the much-hated Universal Social Charge again.

The Independent Alliance and pretty much everyone else is demanding the fiscal space be spent several times over.

It is a lose-lose situation for Donohoe.

While technically, he will announce a total increase in Government spending in 2018 of €1.8bn, when measures already committed to including public sector pay increases are discounted, the amount of new spending is about €300m-€350m.

To give a few examples of what he can and cannot do, to reduce the 20% income tax rate by one percent would cost €523m in the first year and €606m every year after that.

A 1% drop in the higher 40% rate would cost €271m in the first year and €330m thereafter.

It looks like the Fianna Fáil desire to reduce the 5% rate of USC is also very expensive. According to the Revenue Commissioners, a 1% drop in the middle USC rate would cost €336m in the first year and €392m in a full year.

Given how tight the numbers are, a cut of either income tax or USC would wipe out all of the available money and then some.

As a result, it has been suggested that USC might come down by a half of a percent while rather than cutting income tax, Donohoe may go with increasing the point at which the higher rate of tax is paid.

Widening the bands by €500 would cost €102m which is more likely an option.

But that alone would wipe out all the available funds and he has committed to spending increases in key areas like health and housing, which are among the key demands from Fianna Fáil and the Independent Alliance.

So how will he pay for those? He will need to raise tax revenues elsewhere.

Some have suggested that if he is to proceed with the tax cuts as suggested, then he will need somewhere in the order of €400m in additional revenues from alternative sources.

There has been much talk of a sugar tax but that is relatively small fry, bringing in just €40m in a full year.

The Taoiseach has also made it clear that he expects the so-called old reliables like excise of alcohol and tobacco products to go up, but again the income from such an increase would be marginal in the grander scheme of things.

He needs a major revenue raiser and preferably one that does not impact directly on the pockets of the public.

In recent days, this need for revenue has brought the focus sharply on the reduced 9% Vat rate for the hospitality sector and among others the newspaper industry.

Increasing the rate to 10% would raise €109m in the first year and among the suggestions doing the rounds is that the rate could go back to 11%, which obviously would generate €218m.

According to my sources, there is also likely to be some income generator coming from commercial property development in the budget, which could help bridge the gap.

A few other tax revenue raisers may also be needed and Donohoe and his officials will have to be inventive if they are going to try to do half of what is expected of them.

But, the question also has to be asked: Should Donohoe and the Government be trying to meet all of these conflicting demands?

With an economy growing already at 5% pouring further fuel on the fire has already been advised against by the much-ignored Fiscal Advisory Council.

It could be argued that the behaviour of some of our politicians demanding increases to the pensions and carers allowances and many other things shows that we have learned nothing of the mistakes of the past.

The lack of voices from across the political spectrum calling for restraint is somewhat alarming.

With negotiations continuing this weekend, Donohoe somehow must pull a genie out of the bottle and make his numbers add up.

The precarious nature of the Dáil arithmetic means that the public good may be sacrificed for what is politically tolerable.

The brass tax of the matter is that Fine Gael demands will take second place to those of Fianna Fáil and the Independent Alliance, as their support is needed to keep the grand farce of this minority government alive.

The only benefit of the new EU fiscal rules is that the madness has to be contained and Donohoe cannot risk burning the entire house down in order to keep everyone satisfied.

Donohoe has repeatedly made a virtue of saying that the unwise tax cut of today is the savage pay cut of tomorrow and he has insisted that he will not do anything to risk another financial crisis like the one that gripped this country almost a decade ago.

In three days, we will know if he has been able to stay true to his words or not.