An Oifig Buiséid Pharlaiminteach Parliamentary Budget Office

Post-Budget 2020 CommentaryPublication 62 of 2019

Séanadh

Is í an Oifig Buiséid Pharlaiminteach (OBP) a d’ullmhaigh an doiciméad seo mar áis do Chomhaltaí Thithe an Oireachtais ina gcuid dualgas parlaiminteach. Ní bheartaítear é a bheith uileghabhálach ná críochnúil. Féadfaidh an OBP aon fhaisnéis atá ann a bhaint as nó a leasú aon tráth gan fógra roimh ré. Níl an OBP freagrach as aon tagairtí d’aon fhaisnéis atá á cothabháil ag tríú páirtithe nó naisc chuig aon fhaisnéis den sórt sin ná as ábhar aon fhaisnéise den sórt sin. Tá baill foirne an OBP ar fáil chun ábhar na bpáipéar seo a phlé le Comhaltaí agus lena gcuid foirne ach ní féidir leo dul i mbun plé leis an mórphobal nó le heagraíochtaí seachtracha.

Disclaimer

This document has been prepared by the Parliamentary Budget Office (PBO) for use by the Members of the Houses of the Oireachtas to aid them in their parliamentary duties. It is not intended to be either comprehensive or definitive. The PBO may remove, vary or amend any information contained therein at any time without prior notice. The PBO accepts no responsibility for any references or links to or the content of any information maintained by third parties. Staff of the PBO are available to discuss the contents of these papers with Members and their staff, but cannot enter into discussions with members of the general public or external organisations.

Key Messages 3

Budget 2020 – Spending 3

Budget 2020 – Revenue 4

Budget 2020 – The macroeconomic context and fiscal stance 4

Introduction 6

Budget 2020 – Spending 7

Exchequer Spending in 2020 7

Voted Spending 7

The PBO has published a range of factsheets focussing on individual Vote Group

spending set out in Budget 2020. The PBO suggests that Departments could issue

more details of how they will spend the money allocated to them in the Budget.

9

Addressing a disorderly Brexit – an amount of €1,220 million is set aside to address

a disorderly Brexit.

9

A total of €440 million in recurring spending overruns in Health, Education & Skills

and Justice are expected to be notified to Dáil Éireann for 2019.

9

Budget 2020 Demographic Cost Pressures were based on a 2016 analysis,

now updated – the additional costs in 2020 are €76 million.

10

Budget 2020 – Revenue 11

Tax changes included in Budget 2020 are targeted to specific sectors, with a net

revenue impact of €355.4 million (in a full year).

11

The PBO notes that several policy changes included in Budget 2020 were costed

on aggregate; policies should be costed individually to facilitate scrutiny of specific

measures. Where policy changes have the potential to impact tax-payer behaviour,

this should be factored into costing; a point estimate that does not consider potential

behavioural changes should be avoided.

12

The PBO would welcome the publication of a technical note by the Department of

Finance, detailing the approach taken in estimating the cost of each policy change.

This could be published alongside the budget documentation each year.

13

The PBO would also welcome the provision of cost estimates of policy changes

beyond a single year. Multi-annual costings would facilitate greater scrutiny

of new measures.

13

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Post-Budget 2020 Commentary

Contents

Relative to the SPU (based on an orderly Brexit), total tax revenues for 2020

(net of Customs) are projected to be 2.2% lower under a disorderly Brexit.

13

While the PBO welcomes the decision to base Budget 2020 on the assumption

of a disorderly Brexit, the publication of an alternative set of forecasts based

on an orderly Brexit scenario, would have been useful.

14

Overall tax revenue is expected to grow by 4.3% in 2020, driven largely by a

significant increase in Customs revenue relative to 2019 (of 239%). This reflects

the structural change in the trading relationship between the UK and Ireland under

a disorderly Brexit.

16

The PBO would welcome an annual review of the Department of Finance’s

performance in forecasting tax revenue for each tax head. This would facilitate

more informed scrutiny of revenue forecasts.

17

The PBO welcomes efforts in Budget 2020 to broaden the tax base. 17

The PBO notes that planned allocations to the Rainy Day Fund (of €500m) for

2019 and 2020 will no longer be made. Clarity should be provided regarding

how this money will be used if a Brexit deal is reached.

17

The PBO welcomes improvements made in the information provided on tax

expenditures generally, but notes that there is room for additional progress.

17

While substantial additional documentation and analysis was published

alongside Budget 2020, the specific relevance of this material to the Budget

should be made clear.

18

Budget 2020 – The macroeconomic context and fiscal stance 19

A disorderly Brexit as a central scenario for macroeconomic forecasts 19

Labour market 20

Other macroeconomic forecasts 21

Macroeconomic risks 21

Headline fiscal results 22

General Government Balance 22

General Government Debt 22

Forecast Errors 23

Cyclical position of the Irish economy 25

Fiscal Rules and Budgetary Stance 26

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Budget 2020 – Spending

n As a result of planning for a disorderly Brexit, Government is to increase total gross Voted spending envisaged

under Budget 2020 to €71.4 billion. This is an increase of 7.1% over the Further Revised Estimates for 2019.

Excluding the Brexit related spending, the growth rate is 5.1%.

n Growth in Voted spending exceeded growth in Modified Final Domestic Demand (MFDD) in 2018. As MFDD

can be taken as a proxy for growth in the domestic economy, it would normally be prudent to avoid exceeding

that rate. If a disorderly Brexit does not happen, then Voted spending growth will continue at a significantly

higher rate than projected MFDD.

n If a disorderly Brexit does happen, then Voted spending growth at a much higher rate than MFDD may be

useful to counter the economic shock. However, this depends on how this extra money is spent and whether

it is targeted. Three quarters of the increase in expenditure between 2019 and 2020 (€3.8 billion of €5 billion),

in particular Health, has no direct linkage with Brexit.

n Excluding Brexit contingency spending, all Vote Groups current spending in 2020 is set to increase. In the

context of a robust economy and the significant increases in current spending made in recent years, the basis

for the introduction of new policy measures is unclear. It is also unclear as to how the Government intends

to measure and show the added value of this new spending. The current system of performance budgeting

does not generally facilitate a consistent or useful scrutiny of Voted spending.

n The PBO has on its webpage published a range of factsheets focussing on individual Vote Group spending

(the largest ones and those most affected by the prospect of a disorderly Brexit) set out in Budget 2020.

n The Budget 2020 documentation is unclear on some issues. The PBO suggests that Departments could,

for Budget 2021, issue their own more detailed explanations as to how they will spend the money allocated

to them in the following year.

n €1.2 billion is set aside to address a disorderly Brexit. It was announced that the detailed allocation of

these funds will be set out in the Revised Estimates for Public Services 2020 to be published at Christmas.

This is an early point in time to apportion this spending as the impacts of Brexit are unlikely to be fully visible

in early December. The PBO would query whether this is appropriate if, for example, the departure of the

United Kingdom from the European Union is delayed.

n Alternatively, if the UK departs the EU on the basis of a ‘deal’ then this too would be expected to constitute

an economic shock albeit a less severe one than a disorderly Brexit. Budget 2020 did not address how this

scenario would affect spending in 2020.

n A total of €440 million in recurring spending overruns in Health, Education & Skills and Justice are expected

to be notified to Dáil Éireann in relation to 2019. This will feed into the base spending in these areas.

n Demographic costs were not updated for Budget 2020, but were updated for the period 2020-2030 in an

IGEES paper published a week after the Budget. Overall, the demographic cost projection for 2020 is now

€511 million in 2020 which is an increase of €76 million on what was previously forecast (in 2016).

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Post-Budget 2020 Commentary

Key Messages

Most of these increases relate to Health and to the introduction of an estimate for Disability & Carer’s Allowances

within Employment Affairs & Social Protection (EASP) expenditure.

It is unclear why less detail is now provided for Health and Education & Skills, or how the demographic saving

for the Children and Youth Affairs Vote (projected in the previous, 2016, paper) has been addressed.

Any updates to spending ceilings as a result of the new estimate for demographics will not now be published

until July 2020.

Budget 2020 – Revenue

n Tax policy changes included in Budget 2020 are targeted to specific sectors, with a net revenue impact

of €355.4 million (in a full year).

n Tax revenue is expected to grow by 4.3% in 2020, driven by a significant increase in Customs revenue relative

to 2019 (of 239%). This reflects a structural change in the trading relationship between the UK and Ireland under

a disorderly Brexit. Relative to the SPU (based on an orderly Brexit), total tax revenue for 2020 (net of Customs)

is projected to be 2.2% lower under a disorderly Brexit.

n While the PBO welcomes the decision to base Budget 2020 on the assumption of a disorderly Brexit, the

presentation of an alternative set of forecasts based on an orderly Brexit scenario, would have been useful.

Planned allocations to the Rainy Day Fund (of €500m) for 2019 and 2020 will no longer be made. Clarity should

be given regarding how this money will be used should an orderly Brexit materialise.

n Generally, the PBO would welcome the publication of a technical note by the Department of Finance, detailing

the approach to estimating the cost of each policy change. Several policy changes included in Budget 2020 were

costed on aggregate. In addition, policy changes that have the potential to impact tax-payer behaviour should

factor this potential impact into costing. Finally, the PBO would welcome the provision of cost estimates beyond

a single year. Multi-annual costings would facilitate greater scrutiny of new measures.

n The PBO would welcome an annual review of the Department’s performance in forecasting tax revenue

for each tax head. This would facilitate more informed scrutiny of revenue forecasts generally.

Budget 2020 – The macroeconomic context and fiscal stance

n Overall, the economy continues to perform strongly with economic overheating potentially emerging in the

medium-term. However, risks are emerging and the macroeconomic forecasts for Budget 2020 have been

based on a “disorderly” Brexit scenario.

n While growth should remain positive, a disorderly Brexit will hit the domestic economy severely in 2020. In the

sectors most exposed to the UK, employment growth will be lower, while the unemployment rate will increase.

n The Government will run a deficit of -0.6% of GDP in 2020 due to a disorderly Brexit. A budget surplus will not

be run again until 2022. However, the fiscal impact of Brexit could be stronger than expected. According to the

range of estimates provided in the SES 2019, under the ‘worst case scenario’ the general government balance

would not return to a surplus until 2024.

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n The Debt-to GNI* ratio is expected to be 97.4% in 2020 (€198.5 billion). This ratio will fall to 93.9% of GNI*

in 2024. This shows that the level of Irish Government debt is still very high and is a fiscal risk as the economy

is vulnerable to external shocks.

n On the direction of the budgetary stance, the deterioration in the primary balance in 2019/2020 from 1.6%

to 0.6% of GDP is the result of:

l lower tax revenue;

l a counter-cyclical policy response to a disorderly Brexit (i.e. Brexit and welfare measures);

l large increase in capital expenditure (+10.8% year-on-year);

l large increase in day-to-day spending (e.g. Health Group up by 6.3%).

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Post-Budget 2020 Commentary

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This Briefing Paper has been prepared by the PBO for Members of the Houses of the Oireachtas to assist in identifying

the key issues arising from Budget 2019. It expands on the Preliminary Review of Budget 2020 (Publication 58 of 2019)

released by the PBO on Budget night.

The PBO was established in the context of Dáil reform, one element of which is to improve parliamentary engagement

with the budget process. One important means of furthering that objective is by the simplification, and increased

accessibility, of lengthy and complex budgetary information. However, there has been little progress in that regard

between Budget 2019 and Budget 2020, especially in terms of the volume of documents produced. This paper therefore

summarises and provides some high level analysis of key budget measures and material.

This paper has been drafted while the outcome of Brexit is still uncertain. The risk of a disorderly Brexit still exists

but the possibility of an orderly Brexit has apparently increased. Budget 2020 was predicated on a disorderly Brexit

occurring and made provision for substantial additional spending (€1.2 billion). It is less clear what additional spending

will be required in the event of an orderly Brexit. Finally, if Brexit is delayed, or does not happen, then spending is still

set to increase at an elevated rate, at a time when the economy is already performing strongly.

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Post-Budget 2020 Commentary

Introduction

Exchequer Spending in 2020

Exchequer spending of just over €80 billion in 2020 is made up of:

n Voted spending of €70.1 billion,1 including:

l €62 billion in voted current spending;

l €8.1 billion in voted capital spending;

n Non-Voted spending of €9.9 billion,2 made up of:

l €8.7 billion in non-voted current spending;

l €1.2 billion in non-voted capital spending.

Voted Spending

The key area of interest is voted current and capital expenditure. This spending pays for most public services

and infrastructure development/maintenance.

Some issues to note in Budget 2020 are that it makes a distinction between:

n ‘core’ voted expenditure; and

n additional expenditure that is a direct response to a disorderly Brexit.

There are one-off calendar related costs this year affecting several areas of spending. While described in the

Expenditure Report 2020 as one-off, there is a similar issue in 2021 though not in 2022.

The result of planning for a disorderly Brexit is that Government is to potentially increase the total gross voted

spending envisaged in Budget 2020 to €71.4 billion. This is an increase of 7.1% over the Further Revised Estimates

for 2019. Excluding the Brexit-related spending, the growth rate is 5.1%.

1 Set out in the Estimates for 2020 and subject to the approval of Dáil Éireann.

2 This spending does not come before the Dáil for approval.

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Post-Budget 2020 Commentary

Budget 2020 – Spending

Table 1: Gross Voted Expenditure 2019 and 2020, €000s

FREV 2019 Budget 2020 Change

Total Gross Voted Expenditure 66,633,300 71,393,000 4,759,700 7.1%

“Core” Gross Voted Expenditure 66,633,300 70,004,000 3,370,700 5.1%

Employment Affairs & Social Protection 20,497,524 21,095,000 597,476 2.9%

Health 17,107,260 18,255,000 1,147,740 6.7%

Education & Skills 10,767,187 11,128,000 360,813 3.4%

All other Votes 18,261,329 19,958,000 1,696,671 9.3%

Disorderly Brexit Response N/A 1,220,000 N/A N/A

Timing Related Cash Costs3 N/A 169,000 N/A N/A

Source: Further Revised Estimates for Public Service 2019 (FREV 2019) and Expenditure Report 2020.

The PBO pointed out in its Pre-Budget Commentary 2020 (pp.25-26), that growth in Gross Voted Expenditure exceeded

growth in Modified Final Domestic Demand (MFDD) in 2018. As MFDD can be taken as a proxy for growth in the domestic

economy, it would normally be prudent to avoid exceeding that rate.

If there is not a disorderly Brexit, Voted spending growth (at 5.1%) will continue at a significantly higher rate than

projected MFDD (~3.9%).

If a disorderly Brexit does happen, MFDD is projected to be 1.7%. Voted spending growth (6.7%) would then be at a

much higher rate than MFDD. This may be justifiable as a counter-cyclical response. That is, an increase in Government

spending may be useful to counter the economic shock. However, its impact depends on how this extra money is spent

and whether it is targeted. Three quarters of the increased spending between 2019 and 2020 (€3.8 billion of €5 billion),

in particular Health, has no direct linkage with Brexit.

It is worth noting that, excluding Brexit contingency spending, all Vote Group current spending in 2020 will increase.

In the context of a robust economy and the significant increases in current spending made in recent years,4 the basis

for introducing new policy measures resulting in further spending increases is unclear. It is also unclear how the

Government intends to measure and show the added value of this new spending. As the PBO has pointed out

during 2019 the current system of performance budgeting does not generally facilitate a consistent or useful

scrutiny of voted spending.

Some post-Budget 2020 additional spending, which was not included in the Expenditure Report 2020, relates

not to additional policy measures but to the costs of demographic changes. This will affect the spending ceilings

for Employment Affairs and Social Protection, Health and Education,5 and is addressed in more detail in the

‘Demographics’ below.

3 This relates to a technical calendar-related issue (number of public service paydays and social protection payment dates.

4 See PBO Infographic 4 of 2018 and PBO Publication 19 of 2019.

5 As the PBO set out in Publication 1 of 2019, there are other areas of expenditure which are indirectly affected by demographics that are not covered by the budgetary provisions made for demographics.

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The PBO has published a range of factsheets focussing on individual Vote Group spending set out in Budget 2020. The PBO suggests that Departments could issue more details of how they will spend the money allocated to them in the Budget.

The Vote Groups prioritised for analysis are the largest ones and those most affected by the prospect of a

disorderly Brexit:

n Agriculture, Food and the Marine – PBO Publication 59 of 2019

n Business, Enterprise and Innovation – PBO Publication 60 of 2019

n Employment Affairs and Social Protection/Social Insurance Fund – PBO Publication 61 of 2019

n Health – PBO Publication 63 of 2019

n Education – forthcoming

n Transport, Tourism & Sport – forthcoming

As the PBO has pointed out in several of these factsheets the Budget documentation is unclear on various issues.

Addressing a disorderly Brexit – an amount of €1,220 million is set aside to address a disorderly Brexit.

The broad headings under which this increased spending will be allocated in 2020 are:

n Temporary targeted measures: €650 million – aimed at Agriculture, Enterprise and Tourism;

n Necessary Compliance checks: €160 million – Ports, Customs etc; and

n Employment supports: €410 million – Social Protection and Labour Market activation.

Additional costs of approx. €50 million related to compliance check staffing have been allocated to Vote groups.

Otherwise, it was announced that the detailed allocation of these funds will be set out in the Revised Estimates for

Public Services 2020 to be published at Christmas. This is an early point in time to apportion this spending and the PBO

would query whether this is appropriate if, for example, the departure of the United Kingdom from the European Union

is delayed again. Alternatively, if the UK departs the EU on the basis of a ‘deal’ then this too would be expected to

constitute an economic shock albeit a less severe one than a disorderly Brexit. Budget 2020 did not address how this

scenario would affect spending in 2020.

A total of €440 million in recurring spending overruns in Health, Education & Skills and Justice are expected to be notified to Dáil Éireann for 2019.

Budget 2020 projects that the following Supplementary Estimates will be sought in November/December:

n €335 million, €50 million and €55 million in the Health, Education & Skills and Justice Vote Groups, respectively.

This money will, effectively, go into the base expenditure for these Vote groups;

n Another €125 million is expected to be needed for the Christmas Bonus under the Employment Affairs and Social

Protection Vote; and

n Another €30 million is required for non-recurring costs in other Departments, including Finance and Transport,

Tourism and Sport.

However, this €595 million in additional expenditure is expected to be offset by underspends of €150 million across

other Vote Groups, and additional Appropriations-in-Aid6 of €75 million. This means that a net amount of €370 million

is estimated to be sought from Dáil Éireann in the coming weeks to fund the Supplementary Estimates for 2019.

6 Appropriations-in-Aid includes income and receipts generated by Departments – see PBO Note 18 of 2018.

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Budget 2020 Demographic Cost Pressures were based on a 2016 analysis, now updated – the additional costs in 2020 are €76 million.

On Budget day, the spending ceilings for 2020 due to demographic change in Health, Education & Skills and

Employment Affairs & Social Protection (EASP) was still based on an IGEES paper published in 2016.7 However, an

updated paper, Budgetary Impact of Changing Demographics from 2020-2030, was published one week after Budget

day – on 15 October. The revised estimates of the cost of demographics was not therefore included in Budget 2020

and any changes to the spending ceilings will not be published until the Mid-Year Expenditure Report 2020 (in July).

This leads to a situation where, for example, the additional and new demographic costing for Disability and Carer’s

Allowances of €29 million8 was not allocated in the Expenditure Report 2020 and will not be set out in the Revised

Estimates for Public Services 2020. However, unless savings are found elsewhere, this money will be required in 2020.

Some of the issues that arise, in relation to Budget 2020, from the updated IGEES paper are:

n The allocations for Pensions and Child Benefit within EASP are nearly the same as they were in 2016;

n The costs for Health for 2020 are €41 million higher than they were in the 2016 paper – the headings remain

the same (Acute, PCRS and Older Persons) but more detail is provided for Acute and Older Persons. The largest

increases relate to Acute (+€26 million) and Older Persons (+€12 million).9 The IGEES paper does not refer to

the findings of the recent PBO publication on health demographics;10

n The IGEES paper notes the demographic savings that will be made in Education as the size of the younger

cohorts of the population decrease – €11 million each year in the period 2027-2030. For 2020 however, the total

cost projection now is €9 million higher than it was when made in 2016. This means that the updated estimate

for 2020 is €54 million11 v. €45 million previously, and as used in Budget 2020. Unlike other areas of spending,

less detail is provided in one respect in the updated paper; the 2016 paper detailed how much would be spent

at primary and secondary level in Special Education whereas the 2019 paper does not. In addition, only one

aggregated estimate is now provided for primary and secondary – it is unclear as to whether special education

at these levels in now included in the cost projections from 2020-2030. Therefore, costs in the new paper are

provided for two categories of spending only; Primary and Post-primary, and Tertiary; and

n The new paper does not provide an estimate of savings for the Childcare scheme (ECCE – administered by

the Department of Children and Youth Affairs). This had been forecast as a demographic saving of €7 million

in 2020 in the paper published in 2016.

Overall, the demographic cost projection for 2020 is now €511 million in 2020, which is an increase of €76 million

on what was forecast in 2016 and what was used in Budget 2020. Most of these increases relate to Health and to

the introduction of an estimate for Disability and Carer’s Allowance within EASP expenditure. It is unclear why less

detail is now provided for Health or how the demographic saving for the Children and Youth Affairs Vote in 2020

has been addressed.

7 Department of Public Expenditure and Reform (2016) Budgetary Impact of Changing Demographics 2017-2027.

8 Of which Disability Allowance is €19.3 million and Carer’s Allowance is €9.4 million.

9 See Table 2 of the PBO Publication 48 of 2019, The future of the Government’s Spending Review: A parliamentary scrutiny perspective, for a review of the IGEES Spending Review 2019 papers on Health Workforce: Consultant Pay and Skills Mix, 2012-2017, and Social Impact Assessment (SIA): Nursing Home Support Scheme (NHSS).

10 See PBO Publication 45 of 2019, The Effect of Changing Demographics on Irish Health Expenditure – An Analysis of Different Approaches and Findings. In particular, the PBO highlighted the different estimates produced by the Department of Health and by the Department of Public Expenditure and Reform in relation to the percentage annual increase in health expenditure needed in 2020 and 2021 (1.8% v. 0.9% respectively).

11 €20m for additional school places, €26m for School Transport Scheme and €7.2m (PBO calculated) for additional teachers.

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Tax changes included in Budget 2020 are targeted to specific sectors, with a net revenue impact of €355.4 million (in a full year).

Budget 2020 contains revenue raising measures of approximately €529.6 million (in a full year), and revenue reducing

measures of approximately €174.2 million (in a full-year). This results in a net revenue gain of €355.4 million. Key changes

by tax category are detailed below,12 along with the revenue impact in a full year (the revenue impact in the first year,

or 2020, is detailed in brackets if different). It should be noted in interpreting these figures that the basis for these

costings has not been detailed or clarified.

Total revenue raising measures: €529.6 million (€489.6 million)

Excise Duty:

n Excise duty on cigarettes (per 20 pack) will rise by 50c (including VAT) with a pro rata increase on other

tobacco products: €57.1 million.13

n Excise duty on carbon emissions (Carbon Tax) will increase by €6 per tonne of carbon emitted.

These funds will be ringfenced to be used for climate action policies: €130 million (€90 million).

n Electricity Tax will be equalised between businesses and non-businesses: €2.5 million.

n The Diesel Surcharge on vehicles will be replaced with a surcharge on Nitrogen Oxide (NOx) emissions.

This charge will apply on a euro per milligram/kilometre basis, with the rate increasing in line with the

level of Nitrogen Oxide emitted: €25 million.

Stamp Duty:

n The Stamp Duty on commercial property will increase by 1.5%: €141 million.

Corporation Tax:

n The rate of Dividend Withholding Tax will increase by 5%: €80 million.

n New compliance measures on Collective Property Investments. Specifically, relating to Section 110 anti-avoidance

for Irish Real Estate Funds (IREFs), and capital disposals in respect of Real Estate Investment Trusts (REITs):

€80 million.

n The introduction on Anti-Hybrid Rules and the Modernisation of Transfer Pricing rules (i.e. BEPS Implementation):

€10 million.

n A correction for unintended additional relief in respect of the allowance for capital expenditure relating

to scientific research: €4 million.

Total revenue reducing measures: €174.2 million (€106.7 million)

12 Individual measures will be assessed in the PBO’s forthcoming publication on the Finance Bill. The Finance Bill is the legislation that gives effect to tax changes included in the budget.

13 The Revenue Commissioners Ready Reckoner estimates that this increase in Excise could result in a revenue impact from -€42 million to +€57 million, capturing potential behavioural changes. As such, this estimate represents the upper limit of that range.

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Post-Budget 2020 Commentary

Budget 2020 – Revenue

Income Tax:

n The Earned Income Tax Credit will increase by €150: 035 million (€20 million).

n The Home Carer Tax Credit will increase by €100: €8 million (€7 million).

Capital Acquisitions Tax:

n The Inheritance Tax threshold for the tax-free transfer from parent to child (“Grade A”) will increase by €15,000:

€11.2 million (€9.6 million).

Additional reliefs, exemptions and allowances:

n Help-to-Buy was extended (in its current form) to December 2021: €40 million.14

n Measures were announced to support enterprise/SMEs/the Agri-sector. These measures were costed on

aggregate: €80 million (€30 million). These include:

l An extension of Special Assignee Relief Programme (SARP) to December 2022: (latest cost was €18.1 million

in 2016);15

l An extension of the Foreign Earnings Deduction to December 2022 (latest cost was €3.9 million in 2017);16

l Changes to the Key Employee Engagement Programme (KEEP), the Employee and Investment Incentive (EII),

Research and Development (R&D) Tax Credit, the Diesel Rebate Scheme, Microbrewery Relief, Betting Tax;

and,

l Extensions of Section 604B Capital Gains Tax Relief for Farm Restructuring, and the Living City Initiative.

Net impact of tax changes: €355.4 million (€382.9 million)

The PBO notes that several policy changes included in Budget 2020 were costed on aggregate; policies should be costed individually to facilitate scrutiny of specific measures. Where policy changes have the potential to impact tax-payer behaviour, this should be factored into costing; a point estimate that does not consider potential behavioural changes should be avoided.

Several policy changes were costed together (including the extension of multiple different tax expenditures).

This makes scrutiny of the cost of individual policy changes impossible.

In addition, it should be noted that the revenue impact provided in Budget 2020 for the change in Excise on tobacco,

is the upper limit of a range of estimates provided in the Revenue Commissioners pre-budget ready reckoner. This

range reflects the degree of uncertainty arising from a potential behavioural change, following the increase in Excise

(i.e. consumption may fall, resulting in a net revenue loss). Where a point estimate is chosen, then the mid-point of the

range would be a more appropriate figure.

14 The Department have indicated that the full cost of this measure is €100 million, with €60 million “in the tax base”, Budget 2020 – Summary of 2020 Taxation Measures.

15 Cost of Tax Allowances, Credits, Exemptions and Reliefs, Revenue Commissioners.

16 Ibid.

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The increase in Carbon Tax could similarly result in a behavioural change (indeed, this is the objective of climate-friendly

taxes generally). For this reason, planning on the basis of a point estimate, that does not account for a potential

behavioural change, may not be prudent. For this reason, clarity should be provided as to how any shortfall in revenues

raised for the proposed ring-fenced climate action fund will be met.

The decision to extend the Help-to-Buy scheme by two years has been costed at €40 million per annum, with a footnote

indicating that an additional €60 million is “in the tax base”. It is unclear what is meant by this. It should be feasible

to estimate the cost of the specific policy change (i.e. the extension of the scheme by two additional years) separately

from the cost of operating the scheme until the original end-date of December 2019.

Additional revenue is to be yielded from Corporation Tax as part of new “compliance measures”. However, the basis

of this costing is unclear.

The PBO would welcome the publication of a technical note by the Department of Finance, detailing the approach taken in estimating the cost of each policy change. This could be published alongside the budget documentation each year.

The publication of material that outlines the Department’s approach to costing different policy changes would aid

in the scrutiny of these cost estimates. This would outline the data and method(s) used, as well as any underpinning

assumptions that were made (particularly around the consideration of any behavioural impact).

The PBO would also welcome the provision of cost estimates of policy changes beyond a single year. Multi-annual costings would facilitate greater scrutiny of new measures.

Estimates of the future cost of policy changes would facilitate greater oversight and scrutiny of proposed changes.

At present, Members are expected to consider policy changes that may remain an ongoing feature of the tax system

for many years, with costings only provided for a single year. This is insufficient, particularly as certain measures

may become substantially more expensive over time, or only incur a cost at some future date.

Relative to the SPU (based on an orderly Brexit), total tax revenues for 2020 (net of Customs) are projected to be 2.2% lower under a disorderly Brexit.

Figures 1a to 1e show the breakdown (by tax head) of revisions to tax revenue forecasts (for the main tax categories)

between the SPU and Budget 2020. These changes capture a range of factors, including:

n the impact of a disorderly Brexit;

n policy changes included in Budget 2020; and,

n additional information made available to the Department since the SPU (in April).

Relative to the SPU, for 2020 through 2024, sizeable reductions were made to Income Tax, VAT, and Excise, with

more modest reductions for Stamp Duty and Capital Taxes (comprising Capital Gains Tax and Capital Acquisitions Tax).

Total revenue has been revised down by a relatively modest amount, buoyed by significant increases in revenue from

Customs, and a modest expected increase in Corporation Tax.

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It is unclear if forecasts of tax revenue for 2019 account for the impact of a disorderly Brexit in Q4, despite the current

Brexit deadline of October 31. In fact, overall tax revenue has been revised upward since the SPU for 2019, by 0.3%

(driven by a minor increase in Income Tax and another sizeable outperformance of Corporation Tax). In addition,

there has been no change to the forecast of Customs revenue.

For 2020, the forecast of Income Tax in the budget is 1.2% lower than SPU. This reflects robust growth in wages for

2020 (of 3%), despite a moderation in employment growth (to 0.8%). Projected revenues form VAT and Excise are,

on average, 3% lower than SPU. This reflects an expected moderation in consumer spending under a disorderly

Brexit (by 1.3%).

Forecasts of Capital Gains Tax and Capital Acquisition Tax have been revised down since SPU, by 4.8% and 3.3%

respectively, while Corporation tax has been revised up by 0.67%. This emphasises the extent to which Corporation

Tax receipts are concentrated among multinational companies (accounting for 77% of Corporation Tax revenue in 2017),

which are less impacted by a disorderly Brexit.

While the PBO welcomes the decision to base Budget 2020 on the assumption of a disorderly Brexit, the publication of an alternative set of forecasts based on an orderly Brexit scenario, would have been useful.

Figures 1a-1e: Breakdown of changes to revenue forecast, SPU vs. Budget 2020, €m 2019-2023

€57,000

€57,250

€57,500

€57,750

€58,000

Corp

orat

ion

Tax

2019

Exci

se D

utie

s

Stam

p D

utie

s

Bud

get T

ax R

even

ue

SPU

Tax

Rev

enue

Inco

me

Tax

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€59,000

€59,300

€59,600

€59,900

€60,200 Co

rpor

atio

n Ta

x

2020

Exci

se D

utie

s

Stam

p D

utie

s

Cust

oms

Capi

tal T

axes

Bud

get T

ax R

even

ue

SPU

Tax

Rev

enue

Inco

me

Tax

VAT

€61,000

€61,450

€61,900

€62,350

€62,800

Corp

orat

ion

Tax

2021

Exci

se D

utie

s

Stam

p D

utie

s

Cust

oms

Capi

tal T

axes

Bud

get T

ax R

even

ue

SPU

Tax

Rev

enue

Inco

me

Tax

VAT

€64,500

€64,750

€65,000

€65,250

€65,500

Corp

orat

ion

Tax

2022

Exci

se D

utie

s

Stam

p D

utie

s

Cust

oms

Capi

tal T

axes

Bud

get T

ax

SPU

Tax

Rev

enue

Inco

me

Tax

VAT

€67,500

€67,900

€68,300

€68,700

€69,100

Corp

orat

ion

Tax

2023

Exci

se D

utie

s

Stam

p D

utie

s

Cust

oms

Capi

tal T

axes

Bud

get T

ax

SPU

Tax

Rev

enue

Inco

me

Tax

VAT

Source: PBO based on Budget 2020 – Economic and Fiscal Outlook and SPU. Post

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Overall tax revenue is expected to grow by 4.3% in 2020, driven largely by a significant increase in Customs revenue relative to 2019 (of 239%). This reflects the structural change in the trading relationship between the UK and Ireland under a disorderly Brexit.

Figure 2 shows the drivers of tax revenue growth for the major taxes over the forecast horizon (2019 to 2024). As shown,

in spite of the impacts of a disorderly Brexit, tax revenue growth is expected to remain between 4% and 5%. Revenue

growth in 2020 is largely buoyed by a level shift in revenue from Customs (increasing year-on-year by 239%). From 2021

to 2024, revenue is projected to grow at an increasing rate, with robust growth in the major taxes (Income Tax, VAT, and

Corporation Tax), rising from 4.1% in 2021 to 5% in 2024.

Figure 2: Drivers of tax revenue growth, 2019-2024

-1%

0%

1%

2%

3%

4%

5%

6%

2021 2022 2023 20242019 2020

Income Tax VAT Corporation Tax Excise Duties

Stamp Duties Customs Capital Taxes Total Tax Revenue

Source: PBO based on Budget 2020 – Economic and Fiscal Outlook.

Excluding revenue from Customs,17 revenue growth for 2020 is a modest 2.8%, considerably below the average annual

growth rate in preceding years of 6.5% (from 2016 to 2019).

For 2020, Income Tax is expected to grow by 4.3%. Relatively moderate growth is expected for transaction-based taxes,

such as VAT (2.1%) and Excise (0.9%). Capital Acquisitions Tax is projected to remain at 2019 levels, while Capital Gains

Tax is projected to grow by 1.5%.

Corporation Tax is expected to grow by 2.5%. Again, this reflects the extent to which these receipts are concentrated

among multinationals. These firms are generally less likely to be impacted by a disorderly Brexit. In addition, changes

introduced in Budget 2020 are expected to increase the Corporation Tax yield by €174 million.

17 80% of revenue from Customs is returned to the EU, while 20% is retained to cover administrative costs.

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The PBO would welcome an annual review of the Department of Finance’s performance in forecasting tax revenue for each tax head. This would facilitate more informed scrutiny of revenue forecasts.

There have been sizeable forecast errors in recent years for more cyclical taxes (Corporation Tax and Capital Taxes).

The publication of an assessment by the Department of the source of any forecast errors (e.g. identifying issues relating

to the underlying macro-driver used to predict receipts, or the inaccurate costing of policy changes), would facilitate

greater scrutiny of revenue forecasts.

The PBO welcomes efforts in Budget 2020 to broaden the tax base.

Base broadening is being achieved through increases in relatively stable revenue sources, including:

l the increase in the Carbon Tax, and the equalisation of electricity tax between businesses and non-

businesses; and

l the increase in Excise on tobacco products.

However, additional measures included in Budget 2020 risk narrowing the base. These include:

l An extension/expansion of certain tax expenditures (including the Key Employee Engagement Programme,

the Employment and Investment Incentive, the R&D Tax Credit, the Special Assignee Relief Programme,

the Foreign Earnings Deduction, and the Help-to-buy Scheme);

l An increase in the Home Carer and Earned Income tax credits; and,

l An increase in the Group A tax-free threshold in respect of Capital Acquisitions Tax.

The PBO notes that planned allocations to the Rainy Day Fund (of €500m) for 2019 and 2020 will no longer be made. Clarity should be provided regarding how this money will be used if a Brexit deal is reached.

The Rainy Day Fund will still be capitalised with €1.5 billion from the Ireland Strategic Investment Fund (ISIF).

The Budget document details that this funding will be used for Brexit supports should additional borrowing (arising

from a larger deficit) become “counter-productive”. The PBO queries if the Rainy Day Fund should instead be deployed

before borrowing.

The PBO welcomes improvements made in the information provided on tax expenditures generally, but notes that there is room for additional progress.

There are notable improvements in the reporting on tax expenditures, in terms of the quantity and quality of the

information provided.18 This follows engagement by the PBO and Budgetary Oversight Committee, with the Department

of Finance and the Revenue Commissioners.

18 Budget 2020 – Report on Tax Expenditures, Department of Finance, October 8th.

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However, the PBO also notes that changes to tax expenditures introduced in Budget 2020 have been costed on

aggregate, and not on an individual basis. This makes scrutiny of the cost of each measure impossible. In addition,

no costing has been provided for the extension of the Living City Initiative, which was due to end in May 2020.

Finally, the PBO would welcome the publication of forecasts of revenue forgone under existing tax expenditures on

an annual basis. This information is not currently provided. Forecasts are only currently provided for tax expenditures

on introduction, or when a policy change is made and included in the budget.

While substantial additional documentation and analysis was published alongside Budget 2020, the specific relevance of this material to the Budget should be made clear.

17 Spending Review papers were published alongside the Budget, covering a range of topics, including: Túsla,

Emergency Departments, Public Service Employment and Expenditure Modelling, Civil Defence Expenditure, Multi-

annual budgeting for An Garda Síochána, costing of the expansion of free GP care, equality budgeting, Domiciliary

Care Allowance, trends in the Housing Assistance Payment, and a Live Register analysis.

Consideration should be given to outlining the specific relevance of these papers to Budget 2020, such as establishing

an evidence base for a particular policy action taken in the Budget, or providing additional context for budgetary

measures. Otherwise this material could be published at a more suitable time during the year.

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A disorderly Brexit as a central scenario for macroeconomic forecasts

The Economic and Fiscal Outlook published with Budget 2020 includes the Department of Finance’s Autumn Economic

Forecasts. Economic growth is expected in the short-term as GDP is forecast to grow by 5.5% in 2019 and by 0.7% in

2020. The central scenario underpinning the macroeconomic forecasts is a disorderly exit of the UK from the European

Union in October 2019 (i.e. ‘no-deal’). These forecasts (for 2019 and 2020) were endorsed by the Irish Fiscal Advisory

Council.

The Department is expecting higher growth than other institutional bodies in 2019 (see table 2). The Department’s

‘no-deal’ forecasts for 2020 are broadly in line with the Central Bank (0.7% v 0.8%), but are higher for 2021

(2.5% v 1.9%).

Table 2: GDP Growth Forecasts

Forecast: Disorderly Brexit v Orderly Brexit

Date 2019 2020 2021

Disorderly Brexit

Orderly Brexit

Disorderly Brexit

Orderly Brexit

Disorderly Brexit

Orderly Brexit

Department of Finance

October 2019 5.5 5.9 0.7 3.1 2.5 2.4

Central Bank of Ireland

October 2019 4.7 5.0 0.8 4.3 1.9 3.9

General Forecast

Date 2019 2020

ESRI September 2019 4.9 3.1

European Commission July 2019 4.0 3.4

IMF October 2019 4.3 3.5

OECD May 2019 3.9 3.3

Source: PBO based on Department of Finance, Central Bank of Ireland, ESRI, European Commission, IMF, OECD.

If a ‘disorderly’ Brexit happens, it is expected to have significant adverse impacts on economic activity. It will impact on

trade, supply chains, competitiveness and employment in the economic sectors which have the strongest links with the

UK (i.e. agri-food). However, there is significant uncertainty underlying these forecasts as conventional economic models

are based on historical long-run relationships between economic variables. Therefore, they may not adequately capture

the impact of an unprecedented shock such as a disorderly Brexit.

Ireland’s medium-term macroeconomic forecasts expect an average growth of around 2.7% per annum from 2021-2024.

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Post-Budget 2020 Commentary

Budget 2020 – The macroeconomic context and fiscal stance

Labour market

The labour market is approaching full employment. The number of people working in Ireland is expected to grow

by 2.4% this year (revised up from SPU forecast of 2.2%). For 2020, employment growth is projected to slow to 0.8%

due to a disorderly Brexit (revised down from SPU forecast of 2.1%). Employment growth will occur in the sectors least

exposed to the UK, while jobs will be lost in the most exposed sectors. The unemployment rate is expected to increase

to 5.7% in 2020, and 5.9% for 2021 and 2022 (vs an annual average of 5.3% in SPU over 2019-2022).

Figure 3: Employment growth

0%

1%

2%

3%

2021 2022 20232019 2020

No Deal Deal

Source: Budget 2020 – Economic and Fiscal Outlook.

Figure 4: Unemployment Rate

0%

1%

2%

3%

4%

5%

6%

7%

2021 2022 20232019 2020

No Deal Deal

Source: Budget 2020 – Economic and Fiscal Outlook.

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Other macroeconomic forecasts

Wage growth (compensation per employee) is forecast to increase by 3.5% this year and by 3% in 2020. Inflationary

pressures (as measured by the percent change in Harmonised Index of Consumer Prices) will be limited in 2019 (0.9%),

however it is expected to increase in 2020 (1.3%).

Driven by growth in employment, wages and low inflation, personal consumption is forecast to increase by 2.7%

(no revision from SPU) in 2019 and by 1.4% (revised down from 2.5%) in 2020.

Modified investment (investment excluding aircraft leasing and domestic R&D) is expected to grow by 3.2% in 2019

and by -0.2% in 2020. Modified investment was projected to increase by 7.2% in 2019 in the SPU, thus there is a

sizeable reduction in investment in 2019 compared to forecasts. Government consumption is expected to increase

by 4.5% this year (revised up from 3.9%) and by 3.5% in 2020 (revised up from 2.7%).

Exports are forecast to grow by 10.2% in 2019 and 0.9% in 2020 (strongly impacted by a disorderly Brexit in 2020).

Imports are estimated to increase by 22.6% in 2019, a significant increase from SPU estimate of 5.9%. This is explained

by a surge in imports of intellectual property (IP) assets that occurred in the second quarter of this year. Imports are

expected to decrease by 6.5% in 2020 due to the expected disorderly Brexit and an expected normalisation in IP imports.

Macroeconomic risks

Macroeconomic risks have increased in Budget 2020, compared to SPU 2019. The major risks are listed in Table 3.

Table 3: Macroeconomic risks

Risks Budget 2020 Likelihood SPU 2019 Likelihood

Deeper global downturn High p Medium

Geopolitical Factors Medium Medium

Disruption to world trade High p Medium

Larger impacts of Disorderly Brexit High p Medium

Concentrated production base Low Low

Loss of competitiveness Medium Medium

Housing supply pressures High p Medium

Overheating economy Medium Medium

Source: PBO based on Budget 2020 Economic and Fiscal Outlook. Post

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Headline fiscal results

General Government Balance

The Government is planning a small Budget surplus in 2019 of €670 million or 0.2% of GDP, this is an increase

from €170 million in 2018 (0.1% of GDP). The government general balance will move into deficit of -0.6% of GDP

in 2020 due to a disorderly Brexit. In 2020, total Government spending is set to rise by almost €5 billion (5.8%),

while revenue is estimated to rise by €2.3 billion (2.7%). Budget forecasts indicate that a budget surplus won’t

be run again until 2022.

However, it should be noted that there is great uncertainty and the fiscal impact of Brexit could be stronger

than expected. According to the range of estimates provided in the SES 2019, under the ‘worst case scenario’

the general government balance would not return to a surplus until 2024.

Figure 5: Fiscal developments

0%

1%

2%

3%

4%

5%

6%

7%

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

2021 2022 202420232019 2020

General Government Balance € million (RHS)

Year on year % change General Government Revenue

Year on year % change General Government Expenditure

Source: PBO based on Budget 2020 Economic and Fiscal Outlook.

General Government Debt

Ireland’s General Government Debt is expected to be €203.6 billion in 2019 and €198.5 billion in 2020. It was

€205.9 billion at end-2018. After 2020, Ireland’s nominal gross debt will continue to rise to €218.5 billion by 2024.

The Debt-to-GDP ratio was 63.5% of GDP in 2018 and is expected to fall to 59.3% in 2019 and 56.5% in 2020. By 2024

it is expected to be 53.0% of GDP. Ireland will fall below the 60% General Government Debt-to-GDP threshold under

the EU fiscal rules in 2019 for the first time since 2008.

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While the General Government Debt-to-GDP ratio is falling, the Government acknowledges that GDP is not a good

measure for Irish economic activity. Modified GNI (also known as GNI* which strips out some of the activities of

multinational sector) is seen as a better measure of Ireland’s ability to repay its debt.

The Debt-to GNI* ratio is expected to be 100.2% in 2019. This ratio will fall to 93.9% of GNI* in 2024. This shows that

the level of Irish Government debt is still very high and is a fiscal risk in the future. Ireland is a small open economy

and is exposed to trends in the global economy. The size of the national debt means the economy is very vulnerable

to external shocks. If there is a global recession or a significant rise in interest rates, the capacity of the economy

to adapt to the changing fiscal circumstances or to borrow is limited.

Table 4: Debt forecasts

2019 2020 2021 2022 2023 2024

Gross Debt 203.6 198.5 205.8 207.1 213.2 218.5

Nominal GDP # 343.2 351.4 365.2 380.7 396.5 412.6

Nominal GNI *# 203.3 203.7 210.7 218.1 225.6 232.8

Debt-to GDP 59.3% 56.5% 56.4% 54.4% 53.8% 53.0%

Debt-to GNI * 100.2% 97.4% 97.7% 95.0% 94.5% 93.9%

GNI*-to-GDP ratio 59% 58% 58% 57% 57% 56%

# – nearest €25 million.

Source: Budget 2020 Economic and Fiscal Outlook.

Forecast Errors

In the appendix of the Budget 2020 Economic and Fiscal Outlook two tables (A13 and A14) show the Department

of Finance’s historical forecasts for GDP and the general government balance (as a percentage of GDP). The Autumn

forecasts are illustrated in Figure 6 and Figure 7 below. Ireland is a small open economy with a large presence of

multinational firms. Activities of these firms can have a significant impact on GDP growth causing increased volatility.

Producing accurate forecasts therefore becomes increasingly difficult. In recent years, GDP forecasts were pessimistic,

as growth in GDP generally ended up being higher than forecasts. On the other hand, forecasts for the general

government balance predicted a larger deficit (which is in part due to the denominator effect of GDP and also

unexpected revenues some of which are linked to multinationals e.g. corporation tax).

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Figure 6: GDP Forecast vs outturn

0%

5%

10%

15%

20%

25%

2015 2016 201820172013 2014

Autumn 2014

Autumn 2018 Outturn

Autumn 2015 Autumn 2016 Autumn 2017

Source: PBO based on Budget 2020 Economic and Fiscal Outlook.

Figure 7: General Government Balance Forecast vs outturn

-6.5%

-5.5%

-4.5%

-3.5%

-2.5%

-1.5%

-0.5%

0.5%

2015 2016 201820172013 2014

Autumn 2014

Autumn 2018 Outturn

Autumn 2015 Autumn 2016 Autumn 2017

Source: PBO based on Budget 2020 Economic and Fiscal Outlook.

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Cyclical position of the Irish economy

Figure 8: Output Gap estimates. Changes from SPU 2019 to Budget 2020 for Department of Finance’s and EU approach

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2021 2022 202420232019 2020

DOF SPU 2019 DOF Budget 2020 CAM SPU 2019 CAM Budget 2020

(% o

f Pot

enti

al G

DP

)

Source: PBO based on SPU 2019 and Budget 2020.

On the assessment of the Irish economic cycle (whether the economy is over or underperforming relative to its

potential), the Department of Finance’s best estimates of the output gap (based on their alternative methodology)

point to an increased risk of economic overheating for this year (1%) compared to SPU estimates (0.2%), due to an

economy that overall is performing better than expected.

However, in 2020/2021 a “disorderly” Brexit will slow down activity, with the output gap falling to -0.3% (revised down

from 0.8% in SPU). Overtime, the impact on growth will subside, and the domestic economy, boosted by an expected

increase in construction activity, will experience excess demand potentially leading to inflationary pressures (output

gap of 2.1% in 2024).

Estimates of the output gap based on the harmonised methodology (used by the Commission) show a different path

compared to those just outlined and based on the Department of Finance own models. These estimates suggest that

the economy will face a slowdown over the medium-term (this is somewhat explained by the mechanical closure of

the output gap (i.e. assuming that it goes to zero and the economy returns to its potential), which is assumed under the

EU methodology). The harmonised methodology has tended to produce counterintuitive results for Ireland, particularly

in real-time (when events occur). Therefore, these results should be interpreted with caution, with more attention paid

to output gaps calculated using alternative methodologies. It must be noted that estimates of the economic cycle play

a crucial role in the calculation of the underlying condition of the public finances (i.e. the Structural Budget Balance).

As we will see in the next section, large changes to the output gap tend to cause significant changes to the estimated

Structural Balance.

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Fiscal Rules and Budgetary Stance

With respect to the achievement of Stability and Growth Pact obligations or the ‘EU fiscal rules’ one of the targets

is to achieve and then maintain a deficit in structural terms of 0.5% of GDP (the Medium-Term Objective or MTO).

The structural budget balance is calculated as follows:

Structural Budget Balance

Government Budget Balance

Cyclical Budgetary Component

Once Off Measures

And

Cyclical Budgetary Component

Output Gap

Budgetary Elasticity

The budgetary elasticity, the elasticity of the headline balance to the economic cycle, quantifies the percentage change

in the government budget balance in response to a percentage change in the output gap. The budgetary elasticity used

in the EU calculations is currently fixed at 0.53 for Ireland meaning that an increase in the output gap by 1 percentage

points will improve the government balance by 0.53 percentage points.

Two sets of estimates for the Structural Balance are provided in the Economic and Fiscal outlook. The standard set of

Structural Balance estimates use output gap estimates calculated using the harmonised methodology.19 The alternative

set of estimates are based on the alternative estimates for the output gap produced using the Department of Finance’s

own models. While the Department’s own estimates for the Structural Balance can be assumed to be more accurate and

informative, it must be noted that for the compliance with the EU fiscal rules, only the Structural Balance estimates

based on the harmonised methodology are valid.

Looking at estimates for the Structural Balance based on the Department of Finance‘s own estimates of the economic

cycle, Ireland is expected to be at its Medium-term objective (MTO) in 2020. The MTO was met over the last two years,

despite a deterioration in the underlying fiscal position in 2018/2019 (from 0.2% to -0.4%). Broadly, the MTO is expected

to be maintained out to 2024.

Focusing on the annual change, while the General Government Balance deteriorates from 0.2% of GDP to -0.6%

in 2020, the Structural Balance appears to be unchanged (-0.4%). Compared to the SPU 2019, the 2019 estimate for

the Structural Balance is affected by revisions to the output gap (e.g. upward revision from 0.2% to 1% to the output

19 As used by European Commission.

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gap leading to a worse Structural Balance compared to SPU estimates). For 2020, a downward revision to the output

gap (0.8% to -0.3%) offsets a larger deterioration in the Structural Balance which would otherwise have occurred due

to a disorderly Brexit and the additional increases in public spending.

Using the output gap estimates based on the Commission harmonised methodology (CAM), we observe that the

MTO won’t be reached until 2021. Initially, Ireland was expected to reach the MTO in 2020. However, a ‘no-deal’ Brexit

and the policy response to it will result in a larger structural deficit in 2020 (-0.8% compared to -0.4% in SPU 2019).

Based on Budget 2020, there appears to be a breach of the Expenditure benchmark20 (i.e. the spending rule) for

2020 (of 0.3% of GDP), but the deviation will not be significant (0.5% of GDP).

As a final point, on the direction of the budgetary stance, we prefer to focus on developments in the primary balance

given that this is not affected by measurement issues related to the output gap. The deterioration in the General

Government Primary Balance in 2019/2020 from 1.6% to 0.6% of GDP is the result of lower tax revenue, a counter-

cyclical policy response to a disorderly Brexit (i.e. Brexit and welfare measures), large increases in capital expenditure

(+10.8% year-on-year), and in day-to-day spending (e.g. Health Group up by 6.3%). The primary balance is expected

to improve from 2021 onwards.

Table 5: Summary of Output Gap and Structural Balance estimates

Per cent of GDP 2019 2020 2021 2022 2023 2024

Department of Finance’s Alternative Methodologies

Output Gap

SPU 2019 0.2 0.8 1.0 1.4 1.8 n/a

Budget 2020 1.0 -0.3 0.5 1.3 1.9 2.1

Structural Budget Balance

SPU 2019 0.1 -0.1 1.0 0.2 0.2 n/a

Budget 2020 -0.4 -0.4 -0.5 -0.7 -0.7 -0.5

European Commission’s Commonly Agreed Methodology (CAM)

Output Gap

SPU 2019 2.5 1.6 1.0 0.5 0.0 n/a

Budget 2020 2.8 0.4 0.2 0.2 0.1 0.0

Structural Budget Balance

SPU 2019 -1.1 -0.4 0.2 0.7 1.3 n/a

Budget 2020 -1.3 -0.8 -0.3 0.0 0.3 0.7

Source: SPU 2019 and Budget 2020.

20 In summary, the Expenditure Benchmark (EB) rule holds that the net growth rate of government spending must be at or below a country’s medium-term potential economic growth rate.

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Notes

Contact: PBO@Oireachtas.ie Go to our webpage: www.Oireachtas.ie/PBO Publication date: 25 October 2019

Houses of the Oireachtas Leinster House Kildare Street Dublin 2 D02 XR20

www.oireachtas.ie Tel: +353 (0)1 6183000 or 076 1001700 Twitter: @OireachtasNews

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