Economics: Ireland targets post-Budget deficit of 0.2% of GDP for 2018

Ireland unveiled its latest Budget yesterday, and the fiscal package contained much anticipated spending increases and tax cuts. There were no great surprises in Tuesday’s announcement as most of the details were leaked to the media in advance. The Minister for Finance Paschal Donohoe delivered some positive income-tax adjustments for hard-pressed workers, which should boost consumer spending in 2018. The centre-piece of the tax changes was a half percentage point cut in the 2.5% Universal Social Charge rate, a quarter point reduction in the 5% rate as well as a rise of €750 per annum in the point of entry where workers are hit with the top 40% income-tax rate. However, the main focus of the fiscal package was spending increases in the areas of welfare, health and housing.

With the tax reductions and improving labour market, personal spending is in our view likely to increase next year by around 2.0% in real terms, up marginally from an expected rise of 1.9% in 2017. The euro/sterling exchange rate will again be key in 2018. The weakness of the pound this year has encouraged many people to go North to do their shopping, with a big increase in the number of second-hand cars imported from the UK.

The Government’s spending plans on both the current and capital side will also help to boost employment and further reduce the numbers out of work. We have already passed the two million people in employment mark, and another net jobs rise of over 30,000 looks on the cards for 2018, following an estimated increase of 48,000 this year.

Ireland is aiming for a post-Budget General Government Deficit of 0.2% of GDP in 2018 as against an expected out-turn of 0.3% of GDP this year. Meanwhile, Ireland’s debt/GDP ratio looks set to drop to 69.0%, from an estimated 70.1% in 2017.

Following the Budget measures, the Department of Finance is now projecting real GDP growth next year of 3.5%. We are forecasting slightly higher growth of 4.0% after an expected rise in national output of 4.9% in 2017.

Ireland’s strategy in recent years has been to under-promise and over-deliver on the budgetary front, and this is set to be the case again next year. Irish 10-year bond yields have hit record lows again in 2017, and there is nothing in Budget 2018 that in our opinion should spook the markets too much.

Alan McQuaid
Economist