Next two budgets will be more constrained, latest figures suggest

The room for tax cuts and spending increases in the first two budgets to be introduced by the next government is likely to be considerably smaller than in the 2016 package, according to updated Department of Finance calculations.

The 2016 budget, presented earlier this month, added €1.5 billion in tax cuts and spending increases, but the room for manoeuvre in budget 2017 could be as little as €500 million.

The figures show how pressures on spending from an ageing population and pay rises agreed under the Lansdowne Road deal will reduce the room for manoeuvre of the next government. Once these are taken into account, it could have as little as €500 million to add in the next budget and €1.1 billion in the 2018 one.

The Department of Finance forecasts, contained in background calculations as part of the budgetary process, are likely to be altered by growth and tax trends and by EU decisions on our budget objectives.

However, in reply to a question from Fianna Fáil finance spokesman Michael McGrath, Minister for Finance Michael Noonan referred to the figures, though said they were only initial estimates.

These estimates of the so- called “ fiscal space” would alter, partly due to the European Commission updating its forecasts for growth and inflation, he said.

The updated figures show that the estimates of the room for manoeuvre in 2017 are reduced by spending pressures, partly relating to demographic trends, new commitments on capital spending and increasing pay costs related to the Lansdowne Road agreement.

The new government will also have less scope to introduce supplementary estimates – or extra spending introduced during the year to account for pressures in government departments.

Some €1.5 billion was added to spending this year, the Government said before the budget, but in future tighter spending caps under EU rules will make it difficult to add to the spending total during a year.

The figures also assume that tax credits and banks are indexed for inflation, which has not happened in recent years. If the next government decides not to do this – and thus to let tax take a larger amount from rising incomes – it can create a bit more room for manoeuvre.

Under the figures, the fiscal space available in 2018 is estimated to be €1.1 billion, but it rises thereafter to €1.3 billion in 2019 and more than €2.75 billion for the subsequent two years. While the figures for later years are subject to a lot of uncertainty, they do show that if growth remains strong, there could be more scope towards the end of a new government’s term.

Abolition of USC

However, the estimates show there could be relatively little room for tax cuts and spending rises in the 2017 budget unless growth and tax trends improve strongly or the EU adjusts its predictions. Room could be created by raising taxes or cutting some existing spending programmes.

Separate figures released in another reply to Mr McGrath show the cost of abolishing the USC – a target outlined in the budget and also supported by a number of Opposition parties – would be significant. It would cost more than €2.6 billion a year to abolish the charge on all incomes up to €70,000. To abolish it on incomes of more than €70,000 would cost almost €1.4 billion, meaning the total cost of abolition would be just under €4 billion.

These figures, based on 2016 estimates, show the extent of revenue collected by the USC, even after the reductions in the last two budgets.