The Government is doing its best to play down expectations for next Tuesday’s budget. But with the threat of a no-deal Brexit looming, a general election likely in 2020 and key questions on public investment, the carbon tax and more to be faced, the budget will be a vital pointer. And, as ever, it will affect the cash in people’s pockets. Here are the key things to watch:
1. The Brexit package
This will be the trickiest issue for Minister for Finance Paschal Donohoe to face. By next Tuesday we will be none the wiser about whether a no-deal Brexit is likely to happen on October 31st, or not. While a deal negotiated by the EU and UK before the next deadline looks most unlikely on the basis of the latest plan from Boris Johnson, recent UK legislation – the Benn Act – seeks to oblige the UK to ask for an extension.
The Minister will deal with this uncertainty by taking a no-deal as his central expectation. This would involve planning to run a budget deficit of up to 1.5 per cent of GDP next year – though this could be reduced if he decides to dip into the cash due to go into the rainy day fund rather than borrow more.
Then if a no-deal doesn’t happen, the additional cash designed for Brexit contingencies is not spent. Together with the favourable impact of faster growth on tax and spending, this would push the budget back into surplus for next year, to the tune of about 0.4 per cent of GDP.
There is a lot of cash at stake here. The difference between a surplus of 0.4 per cent of GDP and a deficit of 1.5 per cent is around €6.6 billion. Some of this is to account for the hit lower growth will have on the exchequer finances, but the Minister will also set aside significant sums as a contingency in case of a no-deal.
He is expected to set out a range within which these contingency measures are expected to fall and where the fund would come from. He will also outline what kind of programmes would be put in place in the event of a no-deal.
Existing loan programmes have had a mixed take-up and more direct interventions will be needed to save jobs in affected industries. This may involve measures to support working capital, particularly in SMEs hit by Brexit.
There is also likely to be a special support programme offering grants and supports for a limited period and specific measures to protect jobs and the income of employees put on short-term working.
These will all have to be approved under EU State Aid rules, but with thousands of jobs at stake this will be a huge issue in the event of a no-deal.
2. Measures for families – will there by any?
The Taoiseach hinted that he believed the budget could help families, but there is little spare cash to play with. Income tax measures will be limited, though the system may be tweaked to keep those on the minimum wage out of the tax net. However, indications are that the “€5 a week” given in welfare increases and tax cuts in recent years will not happen.
Childcare is a likely target for spare cash, with a new National Childcare Scheme, incorporating all current supports under one umbrella, due to launch this month. The Minister could announce an extension of subsidised childcare hours available to those earning less than €60,000 a year or a rise in the €20-a-week universal childcare subsidy promised under the scheme.
Welfare increases are likely to be targeted rather than across the board – and it will be interesting to see if any increase is made for pensioners. Overall the message will be of a “standstill”, with some key specific concessions.
One problem for taxpayers is that those getting wage increases will see their tax burden rise a bit as bands and credits are not adjusted. And welfare recipients will face inflation in some areas – and this could be a specific issue in a no-deal Brexit with food costs likely to rise quickly.
3. Carbon tax – a potential banana skin?
Expert opinion – for example the Climate Change Advisory Council here or all the major world institutions – argues that putting a price on carbon is essential and that carbon tax needs to rise over a period of years to change people's behaviour.
Will the Minister push up the tax for 2020? And will he commit politically to the target of increasing it to €80 a tonne by 2030 from €20 a tonne now, as recommended by the Oireachtas Committee on Climate Change or just set out some kind of indicative timetable? And how will he allocate the revenues?
It does seem likely that the tax will increase, though possibly by less than €10 a tonne, the level suggested in pre-budget papers from the Tax Strategy Group of senior officials.
The amounts involved here are small in terms of extra tax next year on most fuels – a €10 a tonne rise would add about €1.70 to a 60l petrol fill, €1.96 to a diesel fill, 26 cent to a 12.5kg bale of peat and €1.20 to a 40kg bag of coal. A rise of €5 to €7 would cost even less.
The revenue looks likely to be allocated in part to protect poorer families, probably via a rise in the fuel allowance, paid to 370,000 households. Nonetheless public reaction will make the Government nervous, particularly as people focus on the likelihood of successive increases.
Rural communities argue that the tax would affect them unfairly, while the water charges controversy shows how politically toxic extra charges can be. So despite the widespread support for climate change policies, this is a tricky one, with Sinn Féin and People Before Profit rallying opposition.
Events in Canada, where the carbon tax is a major issue in the federal election campaign, show how the issue can be hugely controversial. Despite evidence that the tax has led to a lower level of emissions than would otherwise have been the case in British Columbia, its effectiveness and impact are debated.
After allocating money to help poorer households, the Government has indicated that the rest will be spent on environmental projects and policies, not on returning cash directly to households.
An increase and widening in support for people retrofitting their homes is one likely target. Other environmentally driven changes, particularly in motor tax, will also be closely watched.
4. The year for entrepreneurs?
Entrepreneurs argue that supports and reliefs available in Ireland are not competitive with other jurisdictions, notably the UK. In the light of Brexit and the need to support these kind of tech-driven firms which can grow quickly, some supports may be extended here, as the cost to the exchequer would be limited.
Among the reliefs involved are those offering a lower capital gains tax rate for investment in tech firms – aimed in particular at serial investors, a scheme offering a tax write-off for investment and a scheme aimed at promoting share options.
Entrepreneurs say these can be vital in the key growth phase for these firms when cash is short. It remains to be seen whether this will happen at a time when little enough is going elsewhere.
5. Any hidden stings?
Given the shortage of cash, the Minister is sure to try to raise cash somewhere – and carbon tax, much of which will be ring-fenced or paid back to households, will not be the only potential target. There has been some speculation of a further rise in commercial property stamp duty, which was pushed up from 2 per cent to 6 per cent in 2018. Higher cigarette prices are always a likely target. Ireland led the way on the plastic bag tax some years ago and extending this to more plastics has been suggested, though might take some time to introduce. A proposal to align diesel and petrol taxes over a period of years could also raise revenue, though given that hauliers are in the Brexit firing line this might not be the year. Overall, in a budget with few giveaways and Brexit on the horizon, the Minister is likely to be cautious about too many nasty surprises.
