Tax surge helps Government beat worst fears on deficit

The Government deficit this year is set to come in below the bottom of its previously estimated range, as strong tax revenues help the figures.

Earlier this year the Minister for Finance, Paschal Donohoe, said he expected the deficit to come in at between €23 billion and €30 billion this year.

However it now looks likely that updated forecasts which will be published this weekend will estimate a figure of €21 billion to €22 billion this year, less than 7 per cent of GDP.

Government spending has risen sharply, with the latest estimates being that total spending will be €86 billion this year, €16 billion higher than pre-Covid expectations. This has pushed the exchequer heavily into deficit, with estimates up to recently that this could exceed €30 billion, or not far off 10 per cent of GDP.

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However an unexpected surge in corporate tax revenues and income tax coming in ahead of expectations will lower the deficit this year. The key figure used for international comparison is the general government deficit, drawn up under EU guidelines.

Lower borrowing this year helps the outlook as there will be a smaller addition to the national debt. Normally, too, better tax and spending trends would carry forward to the following year.

However as the Government has cut its growth forecast for next year and must factor in heavy carry over costs from dealing with the Covid-19 epidemic, it will already face heavy borrowing needs next year, even before budget day measures.

Minister for Finance Paschal Donohoe and Minister for Public Spending Michael McGrath previously estimated that the pre-budget deficit for next year would be €15 billion to €19 billion in cash terms. Donohoe subsequently announced that he would take €1.5 billion from the rainy day fund to help meet costs next year.

As final work continues on the Budget 2021 package, the key issue is what extra cash the ministers will set aside next year to deal with the Covid-19 crisis and also the fallout from the risk of a no trade deal Brexit.

A special fund to promote recovery from the Covid-19 crisis was promised in the programme for government. Given the uncertainties of the pandemic, a significant amount of the cash is likely to be set aside but not allocated until the Government sees how events pan out moving into 2021.