This document summarizes Ireland's 2018 budget and economic outlook. It notes that the economy continues growing strongly at over 5% annually with steady employment growth and low unemployment. While a neutral budget would be normal, the author argues the budget did not do enough to reduce demand pressures and could have taken more money out of the economy given risks like corporation tax changes after Brexit. The budget prioritized investment increases but may not have targeted education spending effectively. By late 2018 the economy could be at full capacity, requiring fiscal policy to slow growth in Budget 2019.

1. Budget 2018
John FitzGerald, TCD and ESRI
Nevin Institute, 18th October 2017

2. Economic Background
• Still growing strongly
– Growing at or above potential
– Brexit: main effects when deal completed
(whenever that is, if there is a deal)
– Employment growth – no signs of slowing
– Unemployment still a bit above long run
• GNP close to potential
– Differs from standard EU presentation

3. Growth in Economy
2013 2014 2015 2016
Gross domestic product at constant market prices, CSO 1.6 8.3 25.6 5.1
Gross national product at constant market prices, CSO 5.5 9.0 16.3 9.6
Gross national income at constant market prices, CSO 5.2 8.9 16.4 9.4
Gross value added at constant basic prices, CSO 1.4 8.2 27.3 5.0
Adjusted NNI – Total, FitzGerald 1.8 4.6 4.9 6.2
Adjusted NNI - Foreign MNEs, FitzGerald 1.1 3.8 6.3 6.7
Adjusted NNI – Irish, FitzGerald 1.9 4.5 6.5 4.4
GVA, constant prices, Domestic Firms, CSO 3.0 6.1 7.3 5.3
Conclusion: The economy is growing at 5%+ a year into 2017
This may continue in 2018
Department estimates growth in GNP 2017 is zero – they must know something.
However, it is just a symptom of the strange data

4. Employment growth, %
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Q1 13 Q1 14 Q1 15 Q1 16 Q1 17
Employment Employment FTE

5. Unemployment rate, %
0
2
4
6
8
10
12
14
16
Q1 98 Q1 00 Q1 02 Q1 04 Q1 06 Q1 08 Q1 10 Q1 12 Q1 14 Q1 16
Unemployment Rate

6. Debt Burden
0
20
40
60
80
100
120
140
160
180
1926 1936 1946 1956 1966 1976 1986 1996 2006 2016
Debt/GNP ratio Debt/GNI* ratio

7. Interest / GNP ratio
0
2
4
6
8
10
12
14
16
18
20
1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
%
Effective Interest Rate Interest / GNP Bond Yield

8. Risks
• Corporation Tax
• Brexit
• Reversal of QE
• Excessive domestic demand

9. Appropriate Fiscal Stance?
• Neutral Budget would be normal
• Guarding against risks:
– Should have reduced demand pressures by taking
money out of the economy
– Instead the Budget was broadly neutral – could have
been worse, like in the 2000-2007 period
• Likely outturn
– Could outperform on growth: affecting tax and
unemployment, and also interest
– If happens: use outturn to cut debt
– Provided control expenditure

10. Tax Measures
• Under-indexation of personal tax
– Indexation would have been €350m, was €260m
• Stamp duty
– Normally would prefer tax on the stock (Rates), not change in
stock of commercial property
– However, will take money out of building to make space for
housing
• Nothing significant on climate change
– Diesel or carbon tax
• 9% VAT rate could have been raised
– 5.5% increase in employment in accommodation etc. sector in
Q2 2017. Brexit and sterling effect more than offset by others
• Under indexation of excise

11. Expenditure
• Welfare – slight over-indexation
• Reduction in pupil teacher ratio
– Evidence suggests not well targeted
• Investment increase
– Where all Budget resources are allocated.
– Increase of €850m or 16%
– Generally welcome attention to housing

12. Distributional Effects
• Welfare – over indexation
• Direct tax – under indexation

13. Medium-Term Implications
• By end of 2018 could be reaching capacity
• Need to slow economy would be more urgent
• Budget 2019 may have significantly greater
resources available than this year
• Conclusion – temptation.
• Answer – Raise more tax than spend
• Would need to take money out of economy
• Brexit (of the hard variety) could avoid the
dilemma – but would pose another