Donohoe warns of need to use Budget 2019 to protect against shocks

The economy is in good shape but careful management of the public finances is needed in the upcoming budget to protect against future negative risks and potential shocks, the Minister for Finance Paschal Donohoe has said.

Appearing before the Oireachtas Committee on Budget Oversight on Wednesday, Mr Donohoe said protectionist policies and the unpredictability of the international tax environment left the State exposed.

He added that the Government is planning for a possible 'no deal' Brexit outcome by putting in place prudent measures in the case of a failure to by the UK and the European Union to reach agreement. He said a hard Brexit could cost the Irish economy a percentage point of growth next year and could be worth 3-3.5 growth points over coming years.

Mr Donohoe also said the housing crisis “weighs very heavily” upon him.

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The measures outlined by Mr Donohoe to insulate the economy against shocks include using windfall receipts to reduce public debt, establishing a new ‘rainy day’ fund, increasing capital expenditure and introducing a suite of supports for SMEs.

In an opening statement to the committee, Mr Donohoe said the Government was “committed to not adopting a budgetary policy that would increase the national deficit and result in additional borrowing”.

“In tandem with the policy of sustainable current expenditure increases is the recognition of the role capital spending can play in mitigating risk, enhancing the resilience of the economy and raising our growth capacity,” he said.

The Minister said Project Ireland 2040 remained of “utmost importance” to the Government. He cited the importance of structural reforms including the allocation of €1.l5 billion towards increased capital investment next year.

The minister said he recognised the “clear supply and affordability constraints in the housing market”, adding that there was “a long way to go before the various issues in our housing market can be resolved”.

Building balance

Mr Donohoe said he was aware that there was a balance to be struck in terms of increased levels of building and a possible risk to the overheating of the economy.

“The lack of housing also poses challenges though and the social and personal difficulties related to lack of homes weighs very heavily upon me,” he said.

The Minister also said he was concerned about the level of overspend in the health sector, which he confirmed was at a higher level than before due to increased spending in the acute hospital sector.

Lastly, Mr Donohoe’s ruled out the introduction of a savings scheme similar to the special savings incentive accounts (SSIAs) brought in by former Minister for Finance Charlie McCreevy in the early 2000s.

Mr Donohoe’s appearance before the committee comes just one week after it published a series of assessments and recommendations in its final pre-budget report.

The committee highlighted risks to the economy, emphasised the need to enhance fiscal transparency by improving the quality of budget information, and called on Mr Donohoe to make an Equality Budget Statement on Budget Day.

The report also appealed to the Government to ensure that Budget 2019 includes a more accurate estimate of the likely total cost of funding the health services in the coming year.