A Post-Budget 2018 Analysis of the Irish Public Finances

The Irish Public Finances:
A Post-Budget 2018 Overview
Simon Barry
Chief Economist Republic of Ireland
Ricardo Amaro
Economist
October 2017

Contents
 Budget 2018: A look at some of the details (from slide 3)
 The economic context and fiscal framework (from slide 14)
 Ireland’s public finances: where do we stand? (from slide 22)

Budget 2018:
A look at some of the details

Budget 2018 sets out the planned use of Eur1.2bn of fiscal space for next
year…
• The July Government Summer Economic Statement (SES) identified net fiscal
space of €1.2bn for Budget 2018
• However, after allowing for:
• Demographics
• Carryovers from Budget 2017
• The Action Plan for Housing
• Extension of the Lansdowne Road Agreement on public sector pay (€0.18bn)
• Only ca. €0.35bn remained to be allocated for 2018 in today’s budget
• Additional revenue-raising measures announced in the budget have amounted to
€0.83bn
• Resulting in additional Budget Day tax and spending easing measures totalling
ca. €1.2bn

…incorporating ca. €0.9 bn of extra spending measures and €0.3bn in tax
reductions. Extra spending was split roughly in 3:1 in favour of current over
capital spending
Budget 2018 Package €mn
Resources available from fiscal space 350
Additional revenue measures 830
Total package 1180
Used to fund:
Tax reductions 335
Extra current spending 684
Extra capital spending 214
Source: Department of Finance

The €830mn package of revenue raising measures was headlined by the stamp
duty hike on commercial property transactions
• Property sector related:
• Stamp duty (€376 mn increase in revenue in 2018): Change of rate on non-residential
property transactions from 2% to 6% (though industry sources are casting doubt over the
projected tax yield from this measure) ; Importantly, commercial property land purchased for
the development of housing will benefit from a stamp duty refund scheme
• Mortgage interest relief (€ 51 mn increase in revenue in 2018): tapered extension of
mortgage interest relief for remaining recipients. 75% of the existing 2017 relief will be
continued into 2018, 50% into 2019 and 25% into 2020. The relief will cease entirely from
2021 onwards
• Vacant site levy will go up from 3% to 7% for land not developed by end-2019 (and held
vacant at the moment) – payable from 2020
• Corporation tax (€ 150 mn increase in revenue in 2018): Mr. Donohoe in today’s speech
recognized the importance of corporation tax stability and assured that the 12.5% will remain part
of Ireland’s offering. However, deduction for capital allowances for intangible assets were limited
to 80% of the relevant income arising from the intangible asset in an accounting period
• Tabaco products tax (€ 64 mn increase in revenue in 2018): excise duty on a packet of
cigarettes increases 50c (including VAT), with a pro-rata increase on all other tobacco products
• Sugar tax (€ 30 mn increase in revenue in 2018): a tax on sugar sweetened beverages is to be
introduced on 1 April 2018
• NB: No changes to tax on alcohol, petrol or diesel

Taxation reductions of €335 mn were dominated by USC and Income Tax cuts
• Universal Social Charge (€177 mn cost in 2018):
• The 2.5% rate has been reduced to 2% and the ceiling increased by €600 to €19,372 (previously
18,772) ensuring that a full-time worker on the minimum wage will remain outside the top rates of
USC
• The 5% rate has been reduced to 4.75%
• USC cuts are again highly progressive in nature, targeting income benefits at lower and middle
income earners: the largest % gains accrue to those on lowest incomes, and the % gains trail off at
upper income levels (in excess of €70k) – see tables on next slides
• Income Tax (Eur132 mn cost in 2018): An increase of €750 in the income tax standard rate band for all
earners, from €33,800 to €34,550 for single individuals and from €42,800 to €43,550 for married one
earner couples
• Tax Credits (Eur24 mn cost in 2018)
• An increase in the Home Carer Tax Credit from €1,100 to €1,200
• An increase in the Self-Employed Earned Income Credit from €950 to €1,150

Net gains from USC and income tax cuts again skewed towards lower incomes,
while some workers will also benefit in 2018 from increases to the minimum wage
Slide 8
Eur per Year % of Net Income Eur per Year % of Net Income
Gross Income
12000* 389 3.2 493 2.1
14000* 455 3.3 507 2.1
18000* 319 1.8 488 1.9
20,000 53 0.3 313 1.2
25,000 66 0.3 326 1.1
30,000 78 0.3 338 1.1
35,000 241 0.8 191 0.6
45,000 266 0.8 366 1.0
55,000 291 0.7 391 0.9
70,000 328 0.7 428 0.8
100,000 328 0.5 428 0.7
150,000 328 0.4 428 0.5
175,000 328 0.3 428 0.4
Note: assumes private sector employee taxed under PAYE, full-rate PRSI contributor
Also assumes that employees currently earning less than €18,759 p.a. earn all their income at the minimum wage, and therefore
benefit from an incease of 3.24% in their gross income (as announced prior to Budget 2018)
Single Person Married Couple, one income, 2 kids*
Decline in Combined Income Tax, PRSI and USC, % of Net Income

The strong progressivity of the tax system is also highlighted by the levels of
average tax rates, and the (pre and post crisis) trends therein
Slide 9
Married Couple, 1 Income, 2 Children, Private Sector
Gross Income
Increase from
2008-2014
Decline since
2014 high
point
2018 Rate
15,000 2.7 -1.9 0.8
20,000 4.9 -4.1 3.5
25,000 5.4 -2.4 5.9
30,000 4.4 -3.1 6.4
40,000 5.5 -3.3 11.6
60,000 6.8 -3.8 22.8
100,000 7.6 -2.6 34.2
120,000 7.7 -2.2 37.1
Average Tax Rate (%)
0
5
10
15
20
25
30
35
40
45
Average Tax Rates, %
Married Couple, 1 Income 2 Children
30,000 60,000 100,000

Other, albeit much smaller, elements of the tax package will
benefit a range of sectors / areas of the economy
• Tourism: The retention of the reduced 9% VAT rate on tourism-related activities which should further
support the on-going expansion in the hospitality sector and help it deal with Brexit risks and challenges
• Housing / Construction / Rental Sector :
• New housing finance initiative called Home Building Finance Ireland that will increase the availability of debt funding
terms to commercially viable residential development projects whose land owners want to build homes
• Owners bringing vacant residential property to the rental market will benefit from a deduction for pre-letting expenses
of a revenue nature incurred on a property that has been vacant for a period of 12 months or more (cap on allowable
expenses of €5,000 per property will apply)
• Qualifying property assets brought between 2012-2014 may be sold free of CGT after a minimum holding period of 4
years (previously 7 years)
• SMEs:
• New Brexit-focussed loan scheme of up to €300mn available at a competitive rate to SMEs, including food
businesses to help them with short-term working capital needs
• Introduction of a share-based remuneration incentive to facilitate the use of share-based remuneration by unquoted
SME companies to attract key employees
• The Agri / Food / Fishery sector:
• In addition to the Brexit loan scheme for SMEs, a further scheme of €25mn will be targeted at the agrifood sector
• Maintenance of the consanguinity stamp duty relief at 1% for inter-family farm transfers
• Leasing of agricultural land for solar panels to be classified qualifying agriculture activity for specific taxation purposes
• Charities will benefit from a VAT refund scheme being introduced to compensate for the VAT they occur on
their inputs. The scheme will be introduced in 2019 in respect of VAT expenses incurred in 2018
• Electric vehicles will benefit from a 0% benefit-in-kind (BIK) rate for a period of 1 year

Spending overview: over half of the Budget spending package is allocated to
Social Protection and Health
Budget 2018, Allocation of Additional Spending
Eur m %
Social Protection 343 38
Health 235 26
Education and Skills 104 11
Housing 102 11
Children 52 6
Other, incl. misc offsets -146 -16
=
Total Current Expenditure Measures 690 76
+
Total Capital Expenditure Measures 215 24
=
Total 905 100
Source: Dept. of Finance

Spending overview: over half of the Budget spending package is allocated to
Social Protection and Health
• Social Protection package includes:
• Weekly rise of €5 in all social welfare payments, including disability allowance, carer’s allowance and both
jobseeker's allowance and benefit
• Weekly increase of €20 in the earnings disregard for the One Parent Family Payment and Jobseeker's
Transitional Scheme
• Weekly increase of €2 in the weekly rate of the qualified child payment
• Health allocation provides for a range of measures, including:
• An additional 1,800 staff aimed at a range of frontline services
• Waiting List Initiative
• Extension of Medical Card Eligibility
• Reduction in the threshold (from €144 to 134) for the drugs payment scheme
• Other prominent measures include:
• Education measures include additional guidance and Special Needs posts as well as primary schools reduction
in pupils-teacher ratio. Additional funding for Higher Education and Apprenticeship and Traineeship through the
National Training Fund is also envisaged.
• Early Years Care and Education extended in Sept 2018 from current average entitlement of 61 weeks to 76
weeks for all qualifying children and increase capitation by 7%
• Extra Justice funding will provide for the accelerated recruitment of an additional 800 Gardai and up to 500
civilian staff

Regarding Housing, it is not fully clear exactly what new and additional resources have been made available in
the Budget. In any case, we welcome the government’s apparent increased ambition in relation to direct social
home building, but rapid scaling-up of delivery from very depressed levels is urgently needed

The economic context and fiscal
framework

A range of indicators, notably including employment, point to an economy
which continues to perform very well
Economic Activity Metrics, % y/y growth
y/y year to date (Q2 unless otherwise stated)
Core Retail Sales 6.6
GDP 5.5
Modified Final Domestic Demand (MDD) 5.1
Tax Receipts (nominal) 5.4
Employment 2.9
GNP 2.6
1) Variables above in real terms unless otherwise stated
2) Core retail sales are year to August
3) Modified Final Domestic Demand includes Private and Govt. Consumption,
and Investment less aircraft leasing and R&D imports
4) Tax receipts are year to Sept

Solid improvement in the economy has seen the tax take rise by 5.4% in the year to
September (albeit that tax revenue is running slightly below target in 2017, a context
not as favourable as in the previous three years)
End-Sept End-Sept Excess/ Excess/
Actual €m Target €m Shortfall €m Shortfall %
Income Tax 13,605 13,793 -188 -1.4%
VAT 11,018 11,055 -36 -0.3%
Corporation Tax 4,670 4,501 169 3.8%
Excise duties 4,216 4,332 -116 -2.7%
Stamp duties 726 823 -98 -11.9%
Capital gains tax 192 157 35 22.2%
Capital acquisitions tax 165 160 6 3.5%
Customs 244 258 -15 -5.7%
Levies 0 0 0 0.0%
Local Property Tax 362 350 12 3.3%
Unallocated Tax Deposits 19 0 19 -
Total 35,217 35,429 -212 -0.6%
Total Excess in Sept '16 483
Total Excess in Sept '15 1,740
Total Excess in Sept '14 703
Tax Revenue Performance vs. Profile (cumulative)

The forecasts underpinning the Budget look reasonable, and have been endorsed by IFAC (Irish Fiscal Advisory
Council). The outlook remains broadly favourable and is looking a bit stronger in the near-term than was
projected by last year’s Budget
Slide 17
Budget 2017 SPU 2017* Budget 2018
October 2016 April 2017 October 2017
2016 4.2 5.2 5.1
2017 3.5 4.3 4.3
2018 3.4 3.7 3.5
2019 3.2 3.1 3.2
*Stability Programme Update 2017
Real GDP % Growth

Since the elimination of its Excessive Deficit in 2015, Ireland has
been subject to the ‘preventive’ arm of the SGP
• This means Irish budgetary policy is set to satisfy conditions laid out in Ireland’s
relatively new budgetary framework which incorporates European and Domestic
elements (rather than having to deliver a required headline deficit target e.g. the
3% deficit target which was the aim under the ‘corrective’ arm of the SGP)
• The new framework is aimed at avoiding:
• repeat of past mistakes
• pro-cyclicality in good times
• spending growth in excess of the economy’s potential growth rate
• large, forced adjustments in bad times
• negative fiscal spillovers across countries

The Medium-Term Objective (MTO) is the key anchor for fiscal policy…
• Ireland, like other countries in Europe, is subject to a Medium-Term Objective (MTO)
• Ireland’s MTO is to achieve a small budget deficit of 0.5% in structural terms
• The Structural Budget Balance (SBB) is the balance adjusted for the cyclical position of the
economy and the impact of any one-offs; in other words the balance that would prevail if the
economy was operating at its full capacity
• In normal economic times, an annual improvement in the SBB of 0.6% of GDP or more must be
delivered until the MTO is reached

…and is complimented by the application of the Expenditure
Benchmark
• The Expenditure Benchmark (EB) is a complimentary requirement, which sets a
limit on allowable expenditure growth after accounting for any discretionary revenue
measures:
• If not at the MTO (as is the case currently in Ireland), allowable spending growth is reduced to a level
below an estimate of long-run potential GDP growth to ensure progress towards MTO. For 2018,
permitted spending growth for Ireland is 2.5% - some way lower than the 4.8% ‘reference rate’ of
potential GDP growth in nominal terms.
• If at or deemed to exceed the MTO, compliance with the EB is, in theory, no longer assessed
• However, in practice, it is our understanding that once a balanced budget is achieved (i.e. once the
MTO is reached), the Govt will continue to use the EB to determine maximum permissible spending
growth.
• This would see a step up in allowable spending growth relative to recent years when it has been
explicitly suppressed to ensure convergence to MTO. But spending growth would still be capped at the
trend economic growth rate, as measured by the EB framework.
• NB: Estimating structural balances and trend / potential growth rates (especially for small, open economies like Ireland) can be highly
problematic and the EB calculation is complex so implementing this framework is not straightforward. Work is ongoing in an attempt to improve
the methodology as it applies in the Irish case.

Budget 2018: rule compliance and balancing the books
• IFAC’s Fiscal Assessment Report from June of this year highlighted that after a major fiscal
adjustment effort over 2008-14, “Ireland has shown a minimalist approach to compliance with the
fiscal rules in the first two years of the new budgetary framework” (i.e. 2016 & 2017)
• Ireland’s estimated SBB in 2017 is a deficit of 1.2% of GDP and a deficit of 0.5% in 2018, meaning
that:
• The planned improvement of 0.7% points would achieve compliance with the required SBB
adjustment of 0.6%
• And more importantly, the MTO is expected to be reached in 2018 i.e. the books are set to be
balanced next year (in structural terms)
• The relevant spending aggregate is expected to grow by 2.3% - less than the 2.5% allowed meaning
that compliance with the EB is also (just about) expected next year
• So the Government may be fully rule-compliant in 2018 for the first time since entering the preventive
arm in 2016, though the EB compliance margin (€100m) is very slim
• NB: achieving the MTO in 2018 results in a significant step-up in allowable spending growth from
2019 on under the EB i.e. estimated annual fiscal space increases materially from 2019 on

Ireland’s public finances:
Where do we stand?

Returning the budget position to balance (expected by 2020 in headline terms) is a
remarkable achievement given the extent of the deficit blow-out in the crisis…

…and reflects a now 7-year trend of improving revenues…

Spending reductions also played a key role in the correction,
though expenditure is now rising again

After a 65% collapse from peak in government capital spending, the increased
allocations to capex spending over the past three years are very welcome…
Slide 26

…as capital spending is now picking up meaningfully, albeit from an extremely low
base
Slide 27

The planned increases in govt capex would take Ireland’s spend (relative to revenue)
back up to relatively elevated levels by international standards
Slide 28

Recurrent and sizeable MNC-related distortions to GDP reduce the usefulness of the
debt-to-GDP ratio; other metrics of Ireland’s debt position, such as the debt-to-GNI*and
debt-to-revenue show debt remains uncomfortably high, albeit rapidly declining

…the debt servicing burden also continues to decline, helped by the ongoing
improvement in growth and revenue trends…

…while lower interest rates also help greatly to cushion the impact of higher
debt, and are a critical source of difference between now and the 1980s…

… with favourable international developments (including the ECB’s QE programme) combining with firm belief
in the robustness of Ireland’s creditworthiness keeping Irish sovereign borrowing costs close to all-time record
lows; Ireland’s 10-year Government yields are now below France’s, while the spread against Germany is at
post-crisis lows
Slide 32

…allowing the NTMA to raise around €15bn of term funding this year at
extraordinarily low costs including €4.75bn of 5-year borrowing at negative rates
Jan Sale of new 20-year benchamark bond @ 1.73% 4
Feb Sale of bonds maturing in 2022 (@ 0.09%) and 2026 (@ 1.03%) 1.25
Mar Sale of bonds maturing in 2026 (@ 1.05%) and 2045 (@ 2.19%) 1.25
Apr Sale of bonds maturing in 2023 (@ 0.2%) and 2026 (@ 0.94%) 1.25
Apr Sale of inflation-linked 23-year bond - annual coupon at @ 0.25% 0.6
Jun Sale of bonds maturing in 2026 (@ 0.72%) and 2045 (@ 1.92%) 1
Jul Sale of bonds maturing in 2022 (@ -0.01%) and 2045 (@ 1.95%) 0.75
Sep Sale of bonds maturing in 2026 (@ 0.59%) and 2037 (@ 1.65%) 1
Oct Sale of new 5-year benchmark bond @ -0.01% 4
Source: NTMA, Bloomberg, UB
Key NTMA Funding Activity, 2017 ytd (Eur bn)

…and in the process further improving the average maturity of Ireland’s debt stock -
Ireland’s government debt now has an average maturity of over 10 years meaning
that Ireland also compares favourably to other European countries
Source: NTMA, ECB
Maturity Profile of Government Debt

Upgrades to Ireland’s sovereign rating continue with the latest development on this front last
month’s upgrade from Moody’s to A2 (equivalent to A)
AAA
AA+
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
BB+
BB
Irish Sovereign Credit Ratings
S&P Moody's Fitch
InvestmentGrade
Sub-investment Grade
(Junk)

Debt levels look set to continue to decline into the medium-term, but
sustainability remains vulnerable to shocks…
220
230
240
250
260
270
280
2016 2017 2018 2019 2020 2021
Baseline (% Revenue)
Scenario (% Revenue)
Debt as % of Gen Govt Revenue: Illustrative Growth Shock Scenario from 2019 Onwards
Source: IFAC
Note: The scenario shows the debt ratio path for an illustrative shock equivalent to a typical
forecast error on nominal GDP growth (-2pp relative to baseline growth rates) in each of the
years 2019, 2020 and 2021

Slide 37
…and downside risks; while there are some notable upside risks (e.g. related to
construction) the balance of risks over the medium term is skewed to the downside,
even aside from Brexit…
• Domestic Risks
• Property market developments
• Competitiveness / expectations management
• High debt
• Politics
• International Risks
• Brexit
• Euro area macro-financial developments and policy settings
• Emerging Market slowdown
• Global financial (markets) stability
• FDI climate / international tax policy changes
• Politics / Geopolitics:
• Economic and diplomatic policy choices of new Trump administration in the US
• Various upcoming European votes (Germany, Italy…)
• North Korea

Slide 38
…though a number of helpful mitigants are in play
• The Irish economy’s strong pre-Brexit momentum offers a very helpful buffer against any shock,
including Brexit.
• A range of indicators show that Ireland’s overall macrofinancial vulnerability is much-reduced
reflecting the large-scale rebalancing and restructuring of the economy in the aftermath of the financial
crisis e.g. the public finances are back on a sustainable course following the major, multi-year
discretionary fiscal tightening which completed in 2014, while the overhaul of the fiscal framework (incl.
new fiscal rules, IFAC oversight and scrutiny) offers important safeguards against the possibility of a
repeat of past policy mistakes; the banking sector has been restructured and significantly down-sized; the
new macroprudential policy framework will help to contain the risk of credit-fuelled imbalances in the
housing market
• The UK-centric nature of the Brexit shock points to the likelihood of a relatively modest negative
impact on growth prospects in Ireland’s other key trading partners including the euro zone and US
with which Ireland does three times more export trade in aggregate than it does with the UK.
• There are opportunities for Ireland to secure additional FDI (possibly including in the financial and
other services sectors) from investors seeking a business-friendly, English-speaking base from which to
serve the EU market now that the UK will be leaving

While the Budget didn’t contain refreshed estimates of future fiscal space, the estimates from the Summer
Economic Statement highlight the significant uplift in available resources which is set to take hold from 2019 (i.e.
after the MTO is reached)
Indicative Net Fiscal Space, Eur bn
2018 2019 2020 2021
Summer Economic Statement 1.2 3.2 3.4 3.4

But approaching macroeconomic capacity constraints coupled with a downside risk skew to the medium term outlook argue for
greater prudence than has been evident in the past two years – rule compliance may well be insufficient to deliver an appropriate
or sufficiently prudent fiscal policy stance for Ireland; the Rainy Day Fund is a potentially useful tool in this regard, though further
detail is needed on its operation (a consultation process has now been launched)

Slide 41
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