Economics: Ireland targets balanced budget for 2019

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, as has been the norm in recent years, leaked to the media in advance. The Minister for Finance Paschal Donohoe delivered some positive income-tax adjustments for hard-pressed workers as regards the Universal Social Charge, cutting the 4.75% rate by 25bps to 4.50%, which should boost consumer expenditure in 2019, albeit modestly. But, 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 3.0% in real terms, but lower than the expected rise of 3.5% in 2018. The euro/sterling exchange rate will again be key in 2019, as will the whole “Brexit” issue. 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 around 50,000 looks on the cards for 2019, following an estimated increase of 68,000 this year.

Ireland is effectively aiming for a balanced budget in 2019 as against an expected deficit of 0.1% of GDP this year. Meanwhile, Ireland’s debt/GDP ratio looks set to drop to 61.4%, from 64.0% in 2018. Debt as a % of GNI* is forecast to fall to 101% in 2019 from 105% this year.

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 remain very low, and there is nothing in Budget 2019 that in our opinion should spook the markets too much. That said, an opportunity may have been missed to run a surplus in 2019, pay off some of the country’s huge debt, and build up a buffer ahead of the next financial crisis.

Alan McQuaid (10/10/18)