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Saturday 10 December 2016

Dan White: Let's hope forecast growth will allow expected tax cuts

Minister for Finance Michael Noonan and Minister for Public Expenditure Brendan Howlin speaking at the Spring Economic Statement at Government Buildings
Minister for Finance Michael Noonan and Minister for Public Expenditure Brendan Howlin speaking at the Spring Economic Statement at Government Buildings

The Government yesterday unveiled its first Spring Economic Statement, which revealed the broad outline of next October's budget and of the following four up to 2020.

According to the Statement, the Government will have "fiscal space" of between €1.2bn and €1.5bn in its next budget, and this will be split 50:50 between spending increases and tax cuts.

This means that hard-pressed taxpayers can look forward to somewhere between €600m and €750m of tax cuts next year.

Having no wish to rain on the Government's parade, I think it is only fair to acknowledge its success in ending austerity a year ahead of schedule. After almost eight years of enduring a cumulative €30bn of tax increases and spending cuts, the Irish public were overdue a break.

ferocious

That's the good news. The bad news is that the public finances remain under ferocious pressure.

The Spring Economic Statement reveals that the Government will have to find an extra €200m a year to offset the impact of an ageing population on health spending. It will have to find a further €200m to fund the higher pension costs resulting from all of those extra older people. This means that the cost of merely maintaining the level of health and pension provision will rise by €4bn a year over the next decade.

Throw in likely higher education spending and it's clear the Government's budgetary wriggle room is still extremely restricted. Unfortunate- ly, the need to remain cautious was largely buried in the small print.

While the Spring Statement - actually two statements, one each by Finance Minister Michael Noonan and Public Expenditure Minister Brendan Howlin - was relatively restrained on what taxpayers could expect next October, the same could not be said for the barrage of leaks that preceded it.

The prospect of lower USC, the reversal of the public sector pay cuts and tax cuts all round were dangled in front of us in the weeks leading up to the Spring Economic Statement. Not surprisingly, the reality failed to live up to the advance billing.

On the subject of public sector pay, Mr Howlin merely promised "to enter into discussions with the trade unions on the issue".

It's not hard to suspect that, having raised the trade unions' expectations on public sector pay to ridiculous heights, the Government is now desperately trying to reduce them to lower, more realistic levels.

There is much in the Spring Economic Statement - in reality a rewritten version of the April 2015 Stability Programme Update we must submit to our European masters, which was also published yesterday - that is worthwhile.

I have always thought that the traditional Irish budgetary process, where the Minister for Finance pulled one or more fiscal rabbits out of the hat every October, was faintly ridiculous. When the absence of any medium-term fiscal planning from one year to the next was added to the mix the results could be, and often were, disastrous.

Now we will know six months in advance the likely shape of the Government's annual budget. Even better is the fact that these budgets will be firmly anchored within a multi-year framework. This should make it much more difficult for the Government to go off the budgetary rails.

That at any rate is the theory. Unfortunately, the reality may turn out to be a good deal less rosy.

confidence

Was I alone in wondering during the build-up to the Spring Economic Statement if, despite having just endured the worst economic downturn since independence more than 90 years ago, we had learnt anything from our experience?

Throwing promises around like snuff at a wake certainly does nothing to inspire confidence.

My fears were further reinforced by the fact that the Government is projecting average annual economic growth of 3.2pc out to 2020.

If the very high economic growth being forecast by the Government fails to materialise, the tax cuts and public spending increases promised in the Spring Economic Statement will quickly turn out to have been no more than a mirage.

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