Tax cuts in budget need not contribute to inflation, Donohoe says

Tax cuts in the budget need not contribute to inflation, the Minister for Public Expenditure Paschal Donohoe has said, in a sign that difficulties in Government over proposed tax cuts may have eased.

Fuelling inflation with tax cuts was a clear concern for the Department of Finance and its allies in the Department of Public Expenditure when the prospect was raised by Fine Gael ministers last month.

But now both Mr Dohonoe and Taoiseach Leo Varadkar said that reducing the amount of tax people had to play was important in helping them meet cost of living increases.

“We had tax reductions in last year’s budget and there was little to suggest when we brought forward those tax cuts that they of themselves were going to be contributing to inflation,” Mr Donohoe said. “And we have seen inflation come down.”

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Mr Donohoe said that the Government “can get the balance right that recognises that there are many who are not helped with the cost of living by additional social welfare support because they don’t get social welfare support in the first place”.

He said a change in their tax burden “can play a role in helping them deal with the higher cost of living”.

But Mr Donohoe said he would continue to argue for running a surplus in the Budget and would “continue to make the argument that we should not be spending money that we may not be confident we will have in the future”.

Mr Donohoe declined to speculate whether the Government would keep its own spending rule of only increasing public expenditure by the level of growth in the economy. The rule was announced by the Government in 2021, but was not observed in its first year, and is not expected to be met this year either.

He declined to say if anyone in Government was arguing for the spending rule to adhered to.

But he said that the need for keeping spending under control was “broadly understood” in Government.

Government sources indicated that discussions on the Summer Economic Statement are progressing well and the document – which sets the guardrails for the October Budget – is expected to be published the week after next.

Earlier, Taoiseach Leo Varadkar said that there would be tax cuts in the budget, but that it would take the form of indexing the credits and bands, which he said, “isn’t really a tax cut”.

“We’re increasing credit and bands so that people don’t pay more tax,” he said. He said there would also be “a welfare package, increasing pensions, increasing weekly payments to people with disabilities, carers, lone parents and so on”.

“If we don’t do those things, people will get worse off in real terms, and I don’t think would be fair, particularly in time when the economy is growing and the public finances are in a good condition,” he said.

He said that the Government will “set aside all or almost all of the windfall corporation tax receipts” for future needs.

Both Mr Donohoe and Mr Varadkar were speaking in Brussels at the European Summit.