THE ECONOMIC BACKGROUND
Budget 2021 is all about COVID-19, housing, health, Brexit, and climate change. It marks the third part of a fiscal trilogy that included the pandemic employment package announced in March, and the July stimulus package. In some respects, framing this budget was very challenging, given the dramatic impact of COVID-19 on the economy and the public finances A record contraction of 6.1% in GDP in the second quarter contextualises the challenge. On the other hand, framing it was relatively straightforward, because there was no choice other than to spend and borrow aggressively, just like almost every other country in the world, and in an environment of engineered historically low bond yields.
Many sectors of the economy were forced to close in March and economic activity contracted sharply in those sectors. As the economy gradually re-opened over the summer months, activity in most sectors has recovered. However, activity levels have been constrained by the various COVID-19 protocols and restrictions in place, not least the localised lockdowns, and more recently the national move to Level 3 restrictions. This is likely to represent the future until it becomes possible to treat the virus, or a safe and effective vaccine is delivered.
The labour market has been the most noteworthy economic casualty of COVID-19. Coming in to 2020, there was concern about the challenges posed by an economy approaching full employment. These concerns have been replaced by very different and much more worrying ones since the beginning of March.
In the year to the end of June, total employment declined by 77,500 or 3.4% to 2.22 million. The greatest rate of decrease was in accommodation and food services (29.6% or 53,600); administration and support services (17.2% or 18,900); construction (12.1% or 17,800); and the wholesale & retail sector (5.2% or 15,600).
At the end of September, the seasonally adjusted unemployment rate, as measured in the standard way, stood at 5.4% of the labour force, or 126,200 people. This represents an increase of 9,200 over the past 12 months. However, if all of those in receipt of the Pandemic Unemployment Payment (PUP) were classified as unemployed, the adjusted unemployment rate would have stood at 14.7% of the labour force at the end of September. This is down from a rate of 24.5% in June.
In the week to 13th October, 228,858 people were on the COVID-19 Pandemic Unemployment Payment scheme. This is 369,142 lower than 5th May, but it increased by 23,265 over the previous week as the Level 3 restrictions started to impact. Table 1 shows the breakdown by sector of those in receipt of the PUP payment and clearly shows those sectors that have been most adversely affected by the health crisis. Accommodation & Food Services, and Wholesale & Retail Trade account for 43.7% of the total numbers in receipt of the PUP. 47.1% of those in receipt of PUP on 13th October were under the age of 34.
Table 1: Sector Breakdown of Pandemic Unemployment Payment (13th October)
|SECTOR||NUMBER||% OF TOTAL|
|Agriculture, Forestry, Fishing, Mining & Quarrying||2,802||1.2%|
|Electricity, Gas, Water & Sewage||842||0.4%|
|Wholesale & Retail Trade||30,500||13.3%|
|Transportation & Storage||7,466||3.3%|
|Accommodation & Food Services||69,535||30.4%|
|Financial & Insurance Activities||5,275||2.3%|
|Real Estate Activities||3,567||1.6%|
|Professional, Scientific & Technical Services||10,599||4.6%|
|Administration & Support Services||22,640||10.0%|
|Public Administration & Defence||3,996||1.7%|
|Human Health & Social Work||7,751||3.4%|
|Arts, Entertainment & Recreation||7,042||3.1%|
Source: Department of Employment & Social Affairs, 6th October 2020.
FISCAL BACKGROUND TO BUDGET 2021
The fiscal challenges informing Budget 2021 are challenging. In 2019, the General Government surplus was equivalent to around 0.4% of GDP or €1.3 billion. Following the response seen to date by Government and the slowdown in economic activity, a deficit of €21.2 billion (6.1% of GDP) is now targeted for 2020.
In the first 9 months of 2020, the Exchequer ran a deficit of €9.37 billion, compared to a surplus of €38 million in the same period in 2019. The ongoing COVID-19 crisis is undermining tax revenues to some extent, but the pressure on public expenditure is very intense.
Total net voted government expenditure at €48.1 billion in the first 9 months of the year was 24.9% higher than in 2019. Current expenditure was 25.9% higher, and capital expenditure was 16.9% higher. Net voted expenditure in the Department of Employment Affairs and Social Protection was 76.9% higher than last year at €14 billion; and the Department of Health was 15.6% higher at €14.5 billion. These 2 departments accounted for 59.3% of total spending in the first 9 months of the year.
In the month of September, total tax revenues at €5.3 billion were €411 million or 7.2% lower than September 2019. Income tax was down by 7.7%; VAT was down by 14%; and corporation tax was up by 8.9%.
Overall tax revenues were 3% lower than the first 9 months of 2019. Income tax receipts were 2.1% lower; corporation tax receipts were 27.9% ahead; and VAT receipts were 19.9% lower. The weakness in VAT receipts reflects weaker consumer spending as a result of the lockdown. The relatively strong performance of income tax once again reflects the fact that lower paid workers who pay little tax, continue to be the main labour force casualties of COVID-19. For workers in FDI companies, financial services, professional services, and the public sector, earnings and employment are being sustained.
Table 2: Tax Revenues (January-Sept 2020)
|HEADING||€ (M)||% OF TOTAL||YEAR-ON-YEAR (%)|
|Capital Gains Tax||299||0.8%||+1.8%|
Source: Department of Finance, Fiscal Monitor, September 2020.
On the expenditure side, net voted government expenditure to the end of September was €7.5 billion higher than expected and €9.5 billion or 28% higher than the first 9 months of 2019.
In the circumstances, a deficit of €21 billion for the full year is justifiable and unavoidable, as it is necessary to support the economy, business, and ultimately employment in the face of an unprecedented and totally unexpected economic shock. Such support will also be required in 2021.
It is clear that the economic, social and political imperative is to get as many people back to work as quickly and as sustainably as possible. In this context, it is essential that a longer-term perspective will be the key theme in Budget 2021 and the National Economic Plan.
THE DEPARTMENT OF FINANCE BUDGETARY ASSUMPTIONS
The economic assumptions underlying Budget 2021 are based on 2 assumptions. Firstly, from the beginning of 2021, bi-lateral trade with the UK will be conducted on the basis of World Trade Organisation (WTO) terms, which is estimated to knock 3% off GDP growth in 2021; and secondly, a widespread vaccine will not be available in 2021.
- GDP is projected to fall by 2.4% in 2020 and to grow by 1.7% in 2021.The decline in 2020 is not as large as previously forecast, due mainly to the strong contribution of the multi-national sector, but the impact on the domestic economy has been severe. The recovery in 2021 is projected to be significantly weaker than previously forecast, because of the assumptions relating to Brexit and COVID-19.
- Modified domestic demand, which is a better proxy for the domestic economy is set to fall by 6.1% in 2020, and to expand by just 4.9% in 2021. Consumer spending is forecast to decline by 7.5% in 2020, and to expand by 7% in 2021.
- Employment is set to fall by 13.7% in 2020, and the unemployment rate is set to average 15.9% of the labour force. Employment is set to grow by 7.6% in 2021, and the unemployment rate is set to average 10.3% of the labour force.
- The forecasts for 2020 could deteriorate, depending on how COVID measures evolve in the final quarter of the year. The overall risks to growth in 2021 are still very significant.
Table 3: Macro-Economic Forecasts Underlying Budget 2021
|Modified Gross National Income||7.6%||-5.1%||2.7%|
|Modified Domestic Demand||3.3%||-6.1%||4.9%|
Source: Department of Finance
The key strategy in Budget 2021 is:
- Budget 2021 is focused on providing further support to the economy.
- Decisions prioritising management of the COVID crisis and Brexit.
- Significant measures are targeted at the three priorities in the Programme for Government – health, housing, and climate change.
- The Budget is based on the assumptions of a disorderly Brexit and no vaccine in 2021.
- There are no broad-based increases in income taxation.
- Budget 2021 is targeting a modest improvement in the headline fiscal position, while allowing deficit-financed spending to continue in the short-term.
KEY ELEMENTS OF BUDGET 2021
Budget 2021 is the most expansionary budgetary package introduced in the history of the state. In the face of the pandemic, fiscal policy is justifiably strongly counter-cyclical. There is no other choice. The tax measures and the very significant increase in public expenditure contained in the budget are aimed at sustaining businesses and households that are in serious difficulty due to the evolving restrictive measures put in place to deal with the virus. There is no option other than to increase spending significantly in the Department of Employment Affairs and Social Protection, and the Department of Health.
In an environment where long-term bond yields are close to zero as a result of the bond buying programme of the ECB, and the relaxation of the EU’s fiscal rules, the Irish Government is correct in borrowing heavily to sustain the Irish economy and Irish society for as long as it takes.
The appropriate response to the health crisis is to ensure that a functioning economy is maintained, and when growth resumes, that will result in a cyclical reduction in government borrowing and debt. Fiscal austerity would not be an appropriate response from a social or economic perspective in the face of the COVID crisis.
Before any changes to taxation or expenditure in Budget 2021, the Department was projecting a general government deficit of €21.2 billion in 2020, equivalent to 6.1% of GDP; and €14 billion in 2021, equivalent to 4% of GDP. Following the changes announced in the budget, a deficit of €21.5 is now forecast for 2020 (6.2% of GDP) and €20.5 billion (5.7% of GDP) in 2021.
The budget package is worth €17.7 billion, that includes €3.5 billion in core current expenditure; €1.5 billion in capital expenditure, which at €10.1 billion is the largest ever capital programme; €3.5 billion is being set aside for a Recovery Fund; and there is a tax package of €270 million net.
Overall tax revenues are forecast to increase by 6.5% in 2021 to reach a record high of €60.4 billion.
Table 4: Tax Revenue Projections Post-Budget 2021
|TAX HEADING||2019||2020f||2021f||% 2021/2020|
|Capital Gains Tax||1,075||935||N/A||N/A|
|Capital Acquisitions Tax||533||450||N/A||N/A|
Source: Department of Finance
The key measures included in Budget 2021 included:
- A General Government Deficit of €21.5 billion is pencilled in for 2020, equivalent to 6.2% of GDP. Following the budget day changes to expenditure (+€17.4 billion expenditure measures, over and above the planned expenditure for 2020 pre-COVID; and €270 million in net tax changes), a deficit of €20.5 billion is projected for 2021, equivalent to 5.7% of GDP. The national debt is projected at €219 billion at end 2020, equivalent to 107.8% of Gross National Income, and 114.7% of Gross National Income at the end of 2021.
- A Recovery Fund of €3.4 billion is being introduced. This will relate to infrastructure development, reskilling and retraining, and supporting investment and jobs. This fund will be related to COVID-19 and Brexit effects.
- Gross Voted Capital Expenditure is projected to increase by 2.8% to €10.1 billion and Gross Voted Current Expenditure
- Expenditure on health to increase by €4 billion.
- The tax debt warehousing scheme is to be extended to include the 2019 balance and 2020 preliminary tax to allow such taxpayers to defer payment for a period of a year with no interest applying; 3% will apply thereafter and will attract no surcharge.
- The EWSS will be extended beyond 31/3/21 to the end of the year. Changes may be made to it, depending on economic circumstances.
- Multi-annual house building programme, with a significant allocation of funding to local authorities to provide social and affordable housing.
- A COVID Restrictions Support Scheme (CRSS) will provide to closed or effectively closed business due to COVID-19 restrictions, a payment of up to €5,000 per week, based on their turnover in 2019.
- The VAT rate for the Accommodation and Food Services sector has been cut from 13.5% to 9%, with effect from 1/11/20 and will expire on 31/12/21. The cut in the top rate of VAT from 23% to 21% that was introduced on 1st September will be allowed run out on 28th February as originally envisaged.
- The enhanced Help-to-Buy Scheme is being extended beyond the planned year-end, to the end of 2021. This entitles first-time buyers buying a new house or apartment relief of up to €30,000.
- No changes in PAYE, PPRSI or USC. However, tax bands and credits were left unchanged. Modest increase in the ceiling for the second USC threshold from €20,484 to €20,687 to prevent minimum wage workers from moving into higher USC band. The weekly threshold for the higher rate of employer’s PRSI increased from €394 to €398.
- In Budget 2020, the carbon tax was increased by €6 per tonne to €26. In line with the Government’s climate targets, this is now being increased by €7.50 per tonne, for motor fuel from midnight on night of Budget, and for other fuels from 1st May 2021. This will lead to a €1.47 increase in the cost of a 60-litre fill of diesel and €1.28 for a similar amount of petrol, as well as add 90-cent to a bag of coal and 20 cent to a bale of peat briquettes. An increase in the Fuel Allowance of €3.50 per week is being introduced to help offset the carbon tax among vulnerable groups and the low paid.
- The Earned Income Tax Credit for self-employed has been increased by €150 to €1,650, to bring it into line with PAYE employees.
- Changes to Vehicle Registration Tax, to disincentivise people from buying higher emission vehicles.
- Rise in pension age to 67 on 1/1/21 scrapped.
- A significant budget package is being introduced for the entertainment and arts sectors.
- The commercial rates waiver has been extended to the end of the year.
In overall terms, Budget 2021 is a very expansionary and counter-cyclical budget that is totally dominated by the COVID-19 crisis, and the possibility of a no-deal Brexit. It is an appropriate strategy in current circumstances, but this is an evolving situation and clearly Government will have to remain very hands on in terms of management of the economy for at least the next 15 months.