Budget 2020: Donohoe presses pause button due to hard Brexit threat

It was always going to be a strange budget, dominated by an event with uncertain consequences which may or may not happen – a no-deal Brexit. Above all, Minister for Finance Paschal Donohoe wants to avoid the nightmare scenario of having to introduce an emergency budget next year if the UK does crash out of the EU.

Going back to the kind of emergency tax hikes or spending cuts seen during the financial crisis, albeit not of the same scale, was to be avoided at all costs. And so, sensibly, a no-deal Brexit was taken as the scenario underlying the budget.

And Budget 2020 is all about Brexit. It is not – really – about climate change, with a small, if still possibly controversial rise, in carbon tax, which will in truth do little to change people's behaviour. And beyond a few measures, Fine Gael has had to park its promise to help families.

Curiosity

If a no-deal Brexit is avoided, then Budget 2020 will be seen as a bit of a curiosity, preparing for a bullet which was eventually dodged. If a no-deal does happen at the end of October, or later, then the question will be whether we put enough aside and if our public finances were strong enough to cope. And given the huge uncertainties of a no-deal outcome, the only answer to that question now is “who knows?” .

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There is a political cost for the Government from Budget 2020, though to an extent it also has Fianna Fáil in the tent. However the main opposition party will not hold back if a no-deal does hit and the Government is seen to be scrambling to respond. The party in power is always vulnerable when trouble hits.

Right now, in what is likely to be the last budget before a general election, the Government has had to resist the temptation of general tax cuts or welfare rises. Given the state of the exchequer finances this will have been intensely frustrating. And with all the extra budget resources going to higher spending, Fine Gael’s claim to be the party of tax cuts is wearing thin.

Given the need to put cash aside in case there is a no-deal Brexit – to save jobs, for one thing – there was no case to splash money around more widely in the budget.

The odd economic position we are in was another reason for caution, because if a no-deal is avoided, we will be back to worrying about economic overheating. And an economy growing strongly does not need an extra injection of cash via big tax cuts .

Threat

To an extent, the Brexit threat made the Government do what it should have done anyway, even if last-minute manoeuvres showed how hard it is for the political system to resist spending cash when it is there.

Tax cuts were a paltry €100 million and €450 million in extra revenue was raised. Spending was increased on budget day by a chunky enough €931 million, with the dividend spread widely, if thinly and some extra help for families in the mix.

But there wasn’t €5 a week for every taxpayer, welfare recipient or pensioner in the audience. And in real terms the tax burden will rise for those getting wage increases and welfare recipients will take some hit from inflation, particularly if a no-deal Brexit leads to price hikes.

We need to look beyond the Budget itself to see the full picture, however. Significant additional resources had already been committed for 2020 – to higher capital spending, public pay, the carry-over costs from last year’s budget and so on. Total spending next year will be just shy of €3.4 billion, up on 2019 – a rise of 5.1 per cent on this year’s budget.

Current spending will rise 4.3 per cent, before we count in the Brexit contingency measures. These are chunky enough rises, particularly if growth slows sharply.

Control

The Government will point out that it raised taxes to meet a fair part of the extra spending committed on budget day itself and is getting overspending in health back under control. Were a no-deal to be avoided, the Budget would be expected to go back into surplus. But it is now clear that the pressure to increase spending year-on-year is back, after a short break during the crisis.

Is this sustainable? Politically this comes down to being able to deliver improved services, rather than being seen to run hard to stand still.

Economically, a document produced alongside the budget called Addressing Fiscal Vulnerabilities points again to our reliance on corporation tax, which has more than doubled in recent years, with the receipts mainly going to increased spending. If some shock hits this revenue, the document outlines the risks to the exchequer and argues that we need to adopt more ambitious budget targets to protect ourselves.

For now, this discussion too is off the table. If there is a no-deal Brexit, our budget will be pushed back into the red, though on current trends we should be able to borrow cheaply.

But as the Minister acknowledged, more cash could be needed to deal with the fall-out – the €1.5 billion rainy day fund will be on stand-by. And the Budget documents warn that the forecast of a deficit of 0.6 per cent of GDP next year is subject to significant uncertainty if this happens. For the next few months, and possibly beyond, it really is all about Brexit.