Little scope for tax cuts in Budget 2019, Department of Finance warns

There will be little scope for meaningful tax cuts or spending increases in the next budget unless additional revenue raising measures are introduced, according to the latest budget update from the Department of Finance.

The Government is earmarking an additional €2.6 billion in spending for Budget 2019 it says in its latest Stability Programme Update, to be submitted to the European Commission later this month.

But, of this, €1.1 billion will be almost entirely be taken up by the carry-over costs associated with the previous budget, demographic-related costs and the latest public sector pay deal, the department said.

The balance of €1.5 million will be allocated to to capital spending increases for housing, health and education set out in the National Development Plan.

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This investment will ensure a sustained increase in social housing delivery, new transport infrastructure, along with additional school infrastructure and the delivery of the new National Children’s Hospital, the department said.

In terms of additional revenue-raising measures, the Minister for Finance Paschal Donohoe has already flagged plans to make changes to the Local Property Tax, which is currently calculated on 2013 property values. However, any changes will be modest and are not expected to impact homeowners until 2020.

In the update the Department of Finance has upgraded its growth forecasts for the Irish economy. It is now predicting economic growth of 5.6 per cent this year and 4 per cent in 2019 on the back positive trends in exports and domestic demand.

It had previously predicted the Irish economy would grow by 3.5 per cent in 2018 and 3.2 per cent in 2019.

The department cautioned, however, that part of the upgrade was driven by statistical distortions emanating from the multinational sector.

In particular, it said exports linked to contract manufacturing, whereby multinationals here contract firms abroad to manufacture products on their behalf, would inflate headline growth.

Nonetheless, the department said the increased growth would see the level of employment rise above its pre-crisis peak of 2.24 million in the first half of this year, which Minister for Finance Paschal Donohoe said was “a sure sign of the distance we have travelled”.

While the outlook for Irish economy, contained in the update, is positive, the department warned of several downside risks to growth here, including Brexit, changes to the corporation tax landscape internationally and the possibility of a trade war between the US and China.

Its projections for growth here are based on pre-Brexit transition period, which would see the UK remain inside the EU until 2020.

“The short-term outlook for our economy, as set out by the update, is positive and this is delivering gains where it really matters – in the labour market,” Mr Donohoe said.

“It is now my expectation that later on this year we’ll have more people at work in Ireland than we’ve ever had before in our history,” he said.

“Our challenge will be to combine that employment growth with real and sustained and affordable growth in real wages.”

“If and when we maintain both that offers the prospect of transforming living standards in Ireland over a period of time, and the combined impact of that is greater than anything that can ever be achieved in any single budget,” Minister Donohoe said.