September exchequer returns suggest Irish economy still solid but also show scope for Budget ’20 to provide some support against Brexit risks


Taxes ahead of target while public spending increases less than planned

General Government surplus for 2019 could be up to twice official projection of €610 million

New official forecasts for 2020 GDP growth of 0.7% based on assumption of ‘hard Brexit'.

Clear inference that Budget 2020 won't be generous but neither should it be restrictive

Budget ’20 must be prudent but can’t hint at panic or consumer and business confidence will weaken further

September returns show corporation tax surge continues and may remain strong into 2020

Other tax headings suggest Irish economy healthy but not overheating

Public spending may pick up before end year but looks to be on more sustainable path than previously

Lower Government debt service costs also provide scope for slightly more generous Budget 2020   

Analysis by Austin Hughes, Chief Economist, KBC Bank Ireland

Exchequer returns for the first nine months of 2019 suggest the public finances are on a somewhat stronger trajectory than envisaged with taxes modestly ahead of target and public spending slightly lower than planned.

There is a strong likelihood of a notably better than predicted full year outturn for the Government finances. While this partly reflects apparently stronger controls on public spending, it is also significantly due to factors beyond the Government’s immediate control in the shape of surging corporation taxes and lower borrowing costs.

These helpful factors should persist  into 2020 and may provide scope for a little more largesse in next week’s budget than previously thought.   

Predicting end year outturns for the fiscal position even at this late stage is extremely difficult both because Irish government finance data are notoriously volatile and also because the letter of the EU fiscal rules tends to foster a back-loading of public spending towards the end of the year. However, our best guess is that even allowing for some over-runs or other forms of acceleration in public spending (including the Christmas bonus for welfare recipients), the General Government balance should be a surplus of around €1bn and possibly even €1.3bn in 2019 rather than the €610 million foreseen in the Stability Programme Update or the €75 million deficit originally envisaged in Budget ’19. We think a significant element of this improvement should carry over into 2020.    

With the Department of Finance now treating a ‘hard Brexit’ as its central case, the new revised official forecast for GDP growth of just 0.7% in 2020 will likely translate into projections of minimal growth in tax revenues next year and significant upward pressure on public spending. There is little question that this will be taken to suggest little or no scope for fiscal support to the economy but in exceptional circumstances such as those implied by a ‘hard Brexit’, the reality is the Irish economy will warrant significant policy support.

Even on a pre-emptive basis, the downside risks from Brexit and more generally from a weakening global economy increase the case for some modest measure of support to the economy in next week’s budget package even allowing for the generally positive economic picture painted by today’s exchequer numbers.

Clearly, Budget ’20 must strike a prudent tone but equally it must avoid hinting at an official panic by suggesting even minor adjustments to welfare and income taxes are now unaffordable, as such a message could resonate strongly with an already nervous Irish consumer .

The decision to opt for a central scenario of a hard Brexit is entirely understandable but the implications for consumer and business confidence of such a development need to be reflected in policies that reassure rather than raise the level of unease. Recent history has taught Irish households and firms that domestic economic policies cannot insulate them from economic downturns but they are also very conscious that measures that prioritise the public finances over broader economic goals can make for intensely painful domestic economic conditions.      

Importantly, scope for some incremental budgetary support is suggested by the September returns because two of the areas centrally contributing to the prospect of a materially better than expected fiscal outturn in 2019 appear relatively ‘Brexit proof’ in the near term at least. Indeed, at the margin, onshoring of Multinational investment to Ireland which is underpinning growth in corporation tax revenues and lower government financing costs that reflect tumbling bond yields might both be further enhanced by Brexit concerns.

This is not to say that such influences would offset adverse Brexit effects in other areas of the Irish public finances. Nor is it to suggest permanently altering the future path of public spending on the basis of higher corporation taxes or lower debt financing costs. However, it is important to acknowledge that buoyant corporation tax revenues and a lower debt burden provide some leeway to cushion what is likely to be an aggravated short term hit (beyond that related to the longer term adjustment) to the Irish economy and the public finances from Brexit.

In terms of the Irish economic picture presented by the exchequer data:

  • Income tax receipts were up by 8.4% y/y in the first nine months, a slight improvement  compared to the mid-year increase of  7.7% and now modestly ahead of target.  In circumstances where weekly earnings are up by 3.5% and employment (adjusted to a full-time basis) up about 2% in the first half of the year, these numbers hint at bracket creep in terms of a higher share of earnings going on taxes. However, the fractional outperformance  relative to target suggests the Irish labour market is not running markedly hotter than the Dept of Finance had envisaged.
  • VAT receipts were up 6.4% y/y in the first nine months, a reasonably solid outturn and notably better than the mid-year outturn 4.9% y/y  and, encouragingly, only slightly (0.4%)  below the targeted increase. The € 47 million year to date shortfall in this tax heading reflects both an increasingly cautious Irish consumer and persistently near flat inflation (+0.6% in August). Again, these trends tend do not paint a picture of an overheating economy.
  • Corporation tax receipts were up 10.6% y/y in the first nine months and are running an impressive €558 million ahead of the original profile. Media reports suggest the full year figure for this heading could exceed the original target  (raised in the interim by €500 million) by  €1bn and these data suggest some possibility of an even stronger outturn. With signs of further onshoring of Intellectual Property in outsized investment numbers in the recent national accounts data for the second quarter, there may be scope for this tax heading to deliver further positive surprises into 2020.
  • Government  day-today spending was up 5.2% y/y but, importantly, it was also some 0.3% or €132 million below the level envisaged. Within  this, spending on health was € 63 million below target but some over-run seems almost inevitable between now and end-year. However, any breach seems unlikely to approach anything near the scale of additional spending seen in recent years.
  • Government capital spending was up 24.9%y/y in the first nine months but this was €163 million or 3.8% less than planned.  
  • Irish government debt interest costs were €4190 million in the first nine months of the year, some € 146 million below target. For the year as a whole a slightly larger saving might be expected.

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.