The budget balance is forecast to weaken
This primarily reflects the cost of supports in relation to a Disorderly Brexit. Additional spending measures were also announced, with these being offset by discretionary tax increases.
Debt remains elevated
As a share of modified gross national income (nominal GNI*), debt has fallen from a peak of 166 per cent to 104 per cent in 2018.
Net debt, which excludes cash and other liquid assets, has fallen more slowly and is forecast to rise in 2020.
While it has recovered from a deep crisis, the Irish economy faces potential overheating on one hand or a potential slowdown (as forecast in Budget 2020) on the other.
This could arise from external shocks including from a disorderly Brexit.
The Budget is based on an expected slowdown
The official forecasts suggest a slowdown in the Irish economy.
This is evident in growth forecasts for gross domestic product, underlying domestic demand, and employment.
The outlook is based on the assumption that the UK leaves the EU in a disorderly fashion.
Economy close to its potential
Official forecasts suggest that the Irish economy is close to its potential.
That is, there is little scope for activity to grow at a fast pace without resulting in overheating.
Spending growth to continue
Government spending has been growing since 2015, accelerating considerably since then.
Budget 2020 shows that the fast pace of growth is set to continue. Yet this would be at a less rapid rate were a soft Brexit to materialise, in which case a contingency for a no-deal Brexit is not planned to be utilised.
Accelerated spending has coincided with the Government receiving unexpected corporation taxes.
Annual corporation tax receipts were €5.4 billion higher than expected in 2018, compared to Budget 2015 forecasts.
Excluding corporation tax, revenues are expected to grow by 5.7 per cent in 2019.
Budget plans and delivery
Repeated slippages in spending plans are evident from an upward pattern to revisions to net policy spending growth (spending adjusted for interest, cyclical unemployment expenditure, and tax measures).
For example, the net policy spending increase for 2018 as set out in SPU 2017 was 3.4 per cent, then 3.8 per cent in Budget 2018 (published October 2017), while the outturn was 6.9 per cent. This pattern was evident in both 2017 and 2018 and looks to have continued into 2019.
Different vintages of net policy spending estimates, year-on-year % change
|SPU||April (previous year)||1.6||3.4||2.5||4.3||3.1|
|Budget||October (previous year)||3.8||3.8||3.8||5.0||5.3|
Net policy spending increased further
Spending in 2019 is now €0.4 billion higher than previously planned. For 2020, the budget shows an increase in spending €1.8 billion above that set out in April’s Stability Programme Update. Of this, €1.2 billion is a contingency for a disorderly Brexit.
Health overruns continue despite large planned increases
Budget 2019 allocated €17 billion to gross voted health spending for 2019. This was an expected (budgeted) increase of €1.7 billion on the projected 2018 base.
Budget 2020 indicates an expected overrun of €0.4 billion in 2019 so that gross voted health spending is expected to increase by €2.1 billion. This unplanned increase repeats the pattern of overruns in recent years.
For 2020, health spending is currently projected to rise by €1.2 billion.
Corporation tax risks
Tax revenues are significantly reliant on corporation tax receipts, which have increased to a record of 18.7 per cent of tax revenue. The average since 2000 is 13.6 per cent.
Budget 2020 forecasts suggest this reliance will remain, with corporation tax revenues growing each year until 2024.
Interest savings continue
Interest costs related to Government debt have repeatedly turned out lower than expected. This has been a gain in terms of improving the overall budget deficit in recent years.
In terms of interest costs for 2020, Budget 2020 forecasts that these will be €4 billion. By comparison, earlier estimates for 2020 were for a cost of €6.7 billion.
Worsening underlying budget balance
The Government’s forecasts show it is close to breaching the target MTO of a 0.5 per cent structural deficit—that is, the deficit adjusted for one-off items and the economic cycle— in 2019 based on the Council’s “principles-based approach”.
The structural balance position deteriorated in recent years as spending has risen quickly. A weaker underlying position could also be masked by surges in corporation tax.
Spending growth above limit
Government net spending—adjusted for spending on interest, cyclical unemployment benefits, smoothed investment, co-financed EU projects, one-off items, and tax measures—grew faster than the limit in every year from 2015 to 2018, based on the Council’s principles-based approach.
For 2019 and 2020, it is also close to a breach.
This release shows preliminary analysis of Budget 2020, which will be explored further as part of the Council’s next Fiscal Assessment Report (due out in November 2019).
 UDD stands for underlying domestic demand, which is the sum of personal consumption of goods and services, net government consumption of goods and services, and underlying investment (which excludes aircraft and intangibles due to their high import content).
 The output gap shown is the Department of Finance’s preferred measure of the cyclical position of the economy.
 Medium-term objective for the structural balance.