Budget Book 2019

1 Budget 2019 economic and Fiscal Outlook (Incorporating the Department of Finance s Autumn Forecasts) BAILE THA CLIATH ARNA FHOILSI AG OIFIG AN tSOL THAIR Le ceannach d reach FOILSEACH IN RIALTAIS 52 FAICHE STIABHNA, BAILE THA CLIATH 2 (Teil: 076 1106 834 n Riomhphost: n tr aon d olt ir leabhar DUBLIN PUBLISHED BY THE STATIONERY OFFICE To be purchased from GOVERNMENT PUBLICATIONS 52 ST. STEPHEN'S GREEN, DUBLIN 2 (Tel: 076 1106 834 or Email: or through any bookseller Price Department of Finance | Macroeconomic and fiscal outlook Page | i Budget 2019 economic AND FISCAL OUTLOOK (INCORPORATING THE DEPARTMENT OF FINANCE S AUTUMN FORECASTS) Page Contents i Tables, figures, annexes and boxes ii 1.))

2 Overview and General Policy Strategy 1 Policy Strategy 1 Short-term economic and Budgetary Outlook 1 2. economic Outlook 4 Summary 4 Macroeconomic Outturn: 2018 4 Macroeconomic Projections: 2019 5 Balance of Payments 8 The Labour Market 10 Price Developments 11 Medium-Term Growth Prospects: 2020-2023 12 Comparison of Forecasts 13 3. Exchequer Developments and Outlook 15 Summary 15 Exchequer Outturn: 2018 15 Exchequer Outlook: 2019 18 Fiscal Outlook: 2020-2023 Rainy Day Fund 18 21 4. General Government Developments and Outlook 22 Summary 22 General Government Balance in 2018 22 General Government Balance in 2019 Compliance with fiscal rules 23 23 Comparison of Forecasts 25 5.

3 General Government Debt 27 Summary 27 Debt Developments Funding Developments 27 30 Comparison of Forecasts 32 6. Risks and Sensitivity Analysis 34 Summary 34 Risks to the economic and Fiscal Forecasts 34 Sensitivity Analysis 37 Monitoring Imbalances in the Irish economy 38 Contingent and Other Liabilities 41 Department of Finance | Macroeconomic and fiscal outlook Page | ii Tables, Figures, Boxes and Annexes Tables Table 1 Summary table main economic and fiscal variables 2 Table 2 External assumptions 5 Table 3 Macroeconomic prospects 8 Table 4 Savings, Investment and the Balance of Payments 10 Table 5 Labour market prospects 10 Table 6 Price developments 12 Table 7 Range of forecasts 14 Table 8 Table 9 Table 10 Table 11 Table 12 Exchequer balance 2018 - 2023 The Impact of Budget 2019 on the Fiscal Position in 2019 Alternative Presentation of Exchequer Position Exchequer balance to GGB 2017 - 2023 Estimate of local government income and expenditure 2019 17 19 20 22 23 Table 13 Comparison of expenditure benchmark compliance 25 Table 14 Table 15 Comparison of Budgetary Forecasts General Government Debt Developments 25 29 Table 16 Gross and Net General Government Debt 29 Table 17 Irish Sovereign Credit

4 Ratings 30 Table 18 Table 19 Table 20 Table 21 Sensitivity Analysis Heatmap of Macroeconomic Indicators, 2002-2019 Contingent and Other Liabilities Macro- economic Risk Assessment Matrix 36 40 41 43 Table 22 Fiscal Risk Assessment Matrix 44 Table 23 Table 24 Macroeconomic Developments Price Developments 46 46 Table 25 Labour Market Developments 46 Table 26 Sectoral Balances 47 Table A1 Difference between Exchequer Balance and GG Balance 53 Table A2 General government balance 2017-2023 54 Table A3 Comparison of Vintages of Receipts and Expenditures for 2018 55 Table A4 General government interest expenditure 2017-2023 56 Table A5 Projected movement in general government debt 2017-2023 56 Table A6 Breakdown of revenue 56 Table A7 Expenditure developments 57

5 Table A8 Table A9 Application of Expenditure Benchmark Structural Budget Balance 57 59 Department of Finance | Macroeconomic and fiscal outlook Page | iii Tables, Figures, Boxes and Annexes (continued) Figures1 Figure 1 Change in external assumptions relative to spring forecasts 7 Figure 2 Figure 3 Figure 4 Employment and the Phillips Curve Medium term imbalances Comparison of autumn and spring 2018 GDP forecast 11 13 14 Figure 5 End September Cumulative Tax Receipts Relative to Profile 15 Figure 6 Comparison of autumn and spring 2018 GG deficit forecast 26 Figure 7 General government debt-to-GDP and debt-to-GNI* 27 Figure 8 Debt interest to revenue ratio.

6 Per cent 28 Figure 9 Maturity profile of long-term marketable and official debt 32 Figure 10 Comparison of autumn and spring 2018 GG debt forecast 33 Figure 11 Figure 12 Figure 13 Figure 14 Figure 15 Fan chart of real GDP, per cent change Gini coefficients of equivalised market and disposable incomes Gini coefficient equivalised disposable Income - Eurostat Average Tax Wedges 2017 Progressivity - Ratio of Tax Wedges at 167 and 67 per cent of average wage, 2017 35 49 50 51 52 Boxes Box 1 Ireland s merchandise trade balance with the UK during EMU 6 Box 2 Box 3 Box 4 Box 5 The growing importance of royalty payments in value added The Limitations of the harmonised methodology for Ireland Short-term refinancing requirements Brexit Impact on Irish Output 8 24 31 34 Annexes Annex 1 IFAC Endorsement of the Macroeconomic Forecast 45 Annex 2 Income Tax.

7 Inequality and Progressivity Issues 48 Annex 3 Annex 4 Additional Fiscal Statistics and Tables Macroeconomic aggregates 2017 to 2023 53 58 Annex 5 Structural Budget Balance and MTO 59 1 In line with the Governments Open Data Initiative the data underpinning charts in this document are available on the Department of Finance website. Department of Finance | Macroeconomic and fiscal outlook Page | 1 Chapter 1 Overview and General Policy Strategy Policy Strategy In less than six months, Ireland s single most important trading partner2 will formally leave the European Union.

8 The central scenario underpinning budgetary planning is that an agreement is reached that facilitates an orderly exit of the UK; this would involve a transition period during which the status quo is preserved until end-2020 and, thereafter, a soft exit involving some form of bilateral trade agreement between the UK and EU27. While even such a relatively benign scenario would impose significant costs on the Irish economy, a disorderly exit involving the absence of a transition period or an exit without a trading agreement would have potentially more severe implications for output, employment and living standards in Ireland. Against this backdrop, it is imperative to boost the resilience of the Irish economy in order to minimise in so far as is possible any future disruption brought on by the UK s departure from the Union.

9 This is why eliminating the budgetary deficit forms a key part of the Government s policy response. The Government is also establishing a Rainy Day Fund in order to mitigate any future downturn in economic activity. At the same time, the Government is committed to using receipts from the disposal of assets for public debt reduction. Boosting the competitiveness of the economy also forms part of the mitigation strategy. To this end, the Government is increasing capital spending by around billion this year an increase of nearly 25 per cent and will maintain capital spending at high levels over the medium term. Indeed, it is worth pointing out that a general government surplus of per cent would be in prospect for next year had the level of capital spending simply been maintained at this year s level.

10 This additional spending will help to eliminate capacity constraints (including in the housing market), improve productivity and enhance the resilience of the economy. It is imperative that high quality public services are provided in an efficient manner that ensures value-for-money for taxpayers. This is why the Government places a high premium on reforming the way public services are delivered. Furthermore, the Government is acutely aware that not all problems can simply be monetised; improving efficiency in the delivery of public services can ensure better quality outcomes for citizens while limiting costs to taxpayers.