10 Oct 2018
Budget 2019: A little something for everyone
Ireland’s Minister for Finance, Paschal Donohoe, has unveiled his second Budget. The backdrop coming into this annual exercise was very favourable. Ireland is poised to be the EU28’s fastest growing economy once again this year (we see GDP +7.0%).
The White Paper setting out estimated Receipts and Expenditure, released on the Friday before the Budget, showed that absent any policy changes, the country would run a surplus of €640m (equivalent to 0.2% of GDP) in 2019. While the economic case for an expansionary budget is flimsy (at best), realpolitik (the minority government is in a precarious position in the Irish parliament) made it an inevitable outturn.
The EU’s fiscal regime limited the net fiscal space to €0.8bn, but in the event the government was able to unveil a €1.1bn package due to a number of revenue-raising measures. The government modestly reduced income taxes (through a mix of rate decreases and band changes) and provided a broad range of welfare increases, expanded childcare and healthcare supports and targeted additional funding on housing, mental health and the National Treatment Purchase Fund. To defray the cost of this, the government has removed the previous special low (9%) rate of VAT on hotels and restaurants while also increasing betting, cigarettes and diesel car taxes.
As a result of the Budget Day announcements, a General Government Balance of just -€75m is now guided for FY19, equivalent to 0.0% of projected nominal GDP. We currently forecast a surplus of 0.7% of GDP and while today’s news imply downside risks to this, we note that the Department has form for providing conservative guidance. One potential area for outperformance is that the projected growth in tax receipts of 5.2% is 100bps lower than the guided increase in nominal GDP – even allowing for the small tax cuts unveiled today this still feels a little light. Headline end-2019 General Government Debt to GDP is guided at 61.4% (Investec: 59.9%), well below the Q113 peak of 124.6%.
In terms of the winners and losers from the Budget, the main beneficiaries are households, due to the income tax cuts and increased welfare supports. The hospitality and leisure sectors will be negatively impacted by the higher VAT rate, although it should be noted that underlying trading is strong, with STR data showing annual RevPAR growth of 9.2% in January-August 2018, so the sector should be able to easily absorb the effect of this increase. Assuming measures to spur housebuilding produce results, this will be good news for building products firms.
We would describe the package of measures as an election Budget, with the modest (equivalent to <0.5% of GDP) resources spread widely by the Minister. Our view remains that the government will seek a stronger mandate in 2019.