DUBLIN (Reuters) - Ireland’s finance minister boosted budget day spending for the second year in a row as the government warned of economic “carnage” if neighboring Britain crashes out of the European Union without a divorce deal.
Having already pre-committed 2.6 billion euros ($2.99 billion) on increased public sector and planned infrastructure spending for next year, Paschal Donohoe, in Tuesday’s annual budget speech, almost doubled the remaining pot to 1.5 billion euros to dish out on further tax cuts and spending increases.
The state’s fiscal watchdog warned ahead of the budget that the booming economy did not need such additional stimulus.
But with an election potentially looming and the fast-growing economy exacerbating deficits in areas such as housing, a scrapping of a reduced VAT rate for the hospitality sector mostly funded the extra 700 million euro of spending.
That allowed the government to keep giving workers a small annual tax break it has promised to continue in future budgets, reverse welfare cuts imposed during a series of austerity budgets a decade ago, and boost infrastructure spending.
“The shared progress we have made is real. However the risks and challenges that we now face are equally real,” Donohoe told parliament in a speech that went long past the allotted hour as he reeled off measure after measure but also struck a tone of caution with 25 different mentions of Brexit.
Donohoe said the government’s “central case” was that Britain and the European Union would reached a Brexit deal in the coming weeks, but the possibility of a no deal had influenced the financial decisions made.
Foreign Minister Simon Coveney warned of “carnage” if Britain crashed left without a deal, though he said that would mostly be felt by Britain, with Ireland likely to benefit from “huge solidarity” from fellow EU member states.
A further round of “Brexit-proofing” measures, which have had mixed results to date, were announced in the budget, including a 300 million euro loan scheme for small and medium sized businesses and the agriculture and food sectors to invest in future growth.
Donohoe said the best preparation for Brexit was responsible budgeting and he intended to balance the state’s books for the first time in more than a decade next year, an improvement on the tiny deficit originally planned but still not the surplus the central bank says should already be running.
The state’s independent fiscal watchdog, set up in response to the years of reckless spending that left the exchequer massively exposed when the 2008 financial crisis hit, voiced concerns over the “not very good budgetary practice” of recent years.
It is particularly worried by successive years of spending coming in over budget, which it fears will happen again next year.
Hotel and restaurant owners were unhappy at their return to the standard 13.5 percent VAT from the 9 percent rate introduced in 2011 to boost the then struggling sector. In a report in July, Ireland’s finance department said the lower rate had become a “significant deadweight”.
“#Budget19 will be known as an election budget paid for by the tourism industry,” Adrian Cummins, head of the Restaurants Association of Ireland, tweeted.
Ireland’s betting tax was also doubled to 2 percent, hitting the country’s largest operator, Paddy Power Betfair (PPB.I), which said it would have cost it 20 million pounds ($26 million) this year. Its shares closed down 5 percent.
Donohoe outlined his planned “exit tax” for firms that move assets or migrate their tax residence from Ireland, setting it in line with the corporate tax rate of 12.5 percent but surprising business by introducing it immediately and not by 2020 when Ireland was obliged to come in line with EU rules.
A company would be liable to pay the exit tax on gains built up in Ireland from any asset - such as intellectual property - it planned to move out of the scope of the Irish tax authorities. The measure is part of a new EU Anti-Tax Avoidance Directive.
The budget will be the last before the next parliamentary election if Prime Minister Leo Varadkar’s Fine Gael-led minority government cannot agree an extension to its “confidence and supply” deal with the largest opposition party, Fianna Fail.
They agreed to open talks on Tuesday but while Varadkar said he wanted to complete the review and potential renewal by the end of the month, Fianna Fail leader Micheal Martin saw talks lasting until until Christmas.
Additional reporting by Graham Fahy; editing by Robin Pomeroy