Irish Public Finances Remain Strong but Challenges Lie Ahead


Exchequer returns data for the first six months of 2016 suggest the Irish economy has sustained a solid positive momentum through the first half of the year but these numbers seem entirely consistent with widespread expectations for a clear easing back in the pace of GDP growth from 2015’s bumper 7.8% rate.

In the wake of the UK referendum result, we have revised back our forecast for GDP growth from 5% to just over 4%. This is unlikely to have any major repercussions for this year’s budget outturn which we still think should come in comfortably below1% of GDP. However, a similar scaling back of our 2017 GDP growth projection from 3.7% to 3% would imply somewhat less scope than envisaged previously to meet proposed spending/tax adjustments in 2017.

As table 1 below indicates, the overall trend in tax revenues remains very strong but we envisage some easing in the pace of growth through the balance of the year.  We now think that income tax receipts will end the year broadly in line or marginally ahead of target as jobs growth continues at a healthy pace but earnings growth remains subdued. Limited wage increases, an uncertain global economic environment and a still significant personal debt burden may go some way towards explaining why VAT receipts have persistently disappointed expectations of a widely based consumer boom. However, strong excise duties suggest a solid if selective increase in consumer spending is continuing.

Corporation tax receipts remain the most notable source of buoyancy in taxes and, encouragingly, today’s data suggest that trend is continuing. In the absence of any ‘big bang’ fallout from the Brexit vote through the second half of 2016 and the evidence of today’s data that public spending remains on a sustainable trajectory, we expect this year’s budget target of a deficit of just below 1% of GDP can be met or slightly bettered.

A somewhat weaker economic growth trajectory and more subdued inflation through 2017 is likely to reduce the suggested leeway for spending/ tax adjustments recently estimated at around €900 million. It is much too early to offer any definitive judgement as to how much of a scaling back might be entailed, but at this stage it is readily possible to envisage an adverse impact of €300-400 million on an uncertainty–related pull-back in the pace of Irish economic growth unless further savings (or fiscal space gymnastics) can be realised in the interim.

This non-exhaustive information is based on short-term forecasts for expected developments in the economy and financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalised investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a judgment as of the date of the report and are subject to change without notice.