EDITORIAL: Budget 2020 should be a reality check

IN as much as it can, Budget 2020 – to be announced next Tuesday, October 8th – will reflect the harsh realities which the UK’s departure from the European Union, hopefully not by the dreaded no-deal trapdoor, are likely to inflict on our economy. Even though Taoiseach Leo Varadkar wants to have a general election by next May at the latest – and it could happen a lot sooner than that even – this will not be a gimmicky giveaway pre-election budget.

The money won’t be there, it seems, even for some modest tax reductions and pension and social welfare increases, and with the increasingly-accepted reality of Brexit a little over three weeks away – unless there is some miraculous intervention to stop it – the economy needs to be buffered against its fall-out.

Things will be bad at best, even if a last-minute withdrawal agreement is made, but most likely will be drastic if there is a ‘no-deal’ crash-out. All of which means that our Minister for Finance, Paschal Donohoe, is caught between a rock and a hard place, and he is right to frame Budget 2020 with the worst-case scenario in mind.

The extra corporation tax windfalls of recent years have been used to balance the books where there were spending over-runs in areas such as health and this is not sustainable long-term. The government has been lucky that these unexpected extra corporation tax receipts have helped them plug gaps.

Historically, corporation tax used to amount to 13-15% of the overall tax take, but in recent years, this has climbed to 18-20%, amounting to €10bn last year. The trend is continuing this year as €4.9bn had been collected in the first eight months of 2019 – almost half a billion more year-on-year so far. If this bubble bursts and receipts returned to 2014 levels, experts fear that it would leave a €5bn hole in the books.

The Irish Fiscal Advisory Council – which the government only heeds when it suits them, if at all –  is predicting that a large budget deficit could emerge due to falling taxes and rising unemployment-related costs as a result of Brexit, warning that this is even before potential customs infrastructure and supports to hard-hit sectors are considered.

The government, it says, might need to cut spending or raise taxes to prevent debt ratios from rising. Looks like it’s time to batten down the hatches, and this time, not just because of Lorenzo!