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The government will be forced to walk a fine line in next month’s budget with debt levels spiraling and the prospect of a no-deal Brexit looming, the Finance Department chief economist warned.
In a presentation given to senior officials in recent days, John McCarthy said that Ireland’s public debt was already “among the highest in the developed world” before the Covid-19 pandemic. And now it will rise again as the government borrows to pay for salary supports and additional healthcare spending.
This could mean that the gross debt of the state rises to about 250,000 million euros or 125 percent of national income, he warned. That would be equivalent to more than 45,000 euros for each man, woman and child in the State or 90,000 euros for each worker in the economy.
In his presentation, published alongside several documents from the Government’s Tax Strategy Group, McCarthy said the economy is in a “finely balanced position” and that budget policy would have to “walk a fine line” between supporting the economy and ensure fiscal sustainability.
The state’s national debt would have to be rolled over in the coming years at potentially higher borrowing rates, he said, while market sentiment towards Ireland, which remains positive, could change rapidly.
McCarthy also warned that the possibility of a disorderly Brexit would impose additional economic and tax costs, as would any loss of corporate tax revenue.
The Government’s budget deficit, the difference between what it spends and what it receives in taxes, is expected to rise to € 30 billion this year from a surplus in 2019. Consequently, Finance Minister Paschal Donohoe’s room for maneuver in next month’s budget is expected to be extremely limited.
In a paper on the economic outlook after the pandemic, the government’s fiscal strategy group dismissed the prospect of a rapid V-shaped recovery, suggesting that economic activity would remain below its pre-crisis peak “for the next few years. years”.
“With the reopening of the economy underway, the focus of budgetary and fiscal policy is shifting towards supporting the economic recovery and therefore moving away from the damage limitation phase to an economic stimulus phase.” , said.
Wage subsidy schemes
It said the Government’s Employment Wage Subsidy Plan, established earlier this month to replace its Temporary Wage Subsidy Plan, would cost € 2.25 billion, based on an average of 350,000 employees using the plan over an extended period. .
In a document on income tax, the group suggested that the government consider extending the favorable tax treatment only available to married couples to cohabitating couples to reflect changing “social norms in Ireland”.
In a review of the carbon tax, he criticizes the way the government has set a goal of raising the tax at a specific rate each year, saying this does not take into account the rise or fall of oil prices.
Consideration should be given to increasing the stamp tax on residential property transactions above € 1 million, which is only 2% and low by international standards.
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