Economy

Favourable tax winds give more budgetary scope

Resilience of tax base means budget deficit will be lower than in other countries

The resilience of the tax base has kept the Government’s expected budget deficit for 2020 much lower, relatively speaking, than elsewhere. It’s expected to be some €21bn. A few months ago we were predicting a €30bn hole in the public finances. Photograph: Getty Images

Tue Oct 13 2020 - 05:30

According to Central Statistics Office (CSO), Ireland's national debt was €204 billion or 57 per cent of gross domestic product (GDP) at the end of last year. That's high for a small open economy like ours, particularly when you consider GDP probably exaggerates the value of the economy by about a third.

That’s where we were entering the pandemic – in other words highly indebted and vulnerable to the whims of global economic conditions.

You might then be inclined to conclude that we are even more vulnerable now in the wake of the billions being borrowed to pay for Covid-linked supports and additional health spending, and with the economy falling into recession.

In one sense you’d be right. But there is an ameliorating factor that’s working in our favour. The resilience of the tax base here has kept the Government’s expected budget deficit for 2020 much lower, relatively speaking, than elsewhere.

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It’s expected to be in region of €21 billion. A few months ago we were predicting a €30 billion hole in the public finances.

There are two reasons for the stronger-than-anticipated performance. Most of the taxable income in Ireland comes from sectors that were least impacted by Covid – in other words most of the impacted workers were in low-paying parts of the economy – and we are still in the midst of a corporation tax windfall. Receipts from the business tax are expected to hit a record €12.5 billion this year.

A €21 billion deficit in 2020 will bring our year-end debt to €225 billion or 65 per cent of GDP. Additional National Treasury Management Agency (NTMA) borrowing – its frontloading funding for 2021 – may push this up to €230 billion.

Yet this is a small increase in the context of the worst global recession in a century. The latest European Central Bank projections suggest that for the euro area as a whole government debt will rise from 84 per cent of GDP at the end of 2019 to 100.7 per cent by end 2020.

This gives Minister for Finance Paschal Donohoe and Minister for Public Expenditure Michael McGrath more scope in Tuesday's budget than they might otherwise have been expected.

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