An Oifig Buiséid Pharlaiminteach Parliamentary Budget Office Pre-Budget 2020 PBO Commentary - Publication 55 of 2019
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An Oifig Buiséid Pharlaiminteach Parliamentary Budget Office Pre-Budget 2020 PBO Commentary Publication 55 of 2019
Séanadh Is í an Oifig Buiséid Pharlaiminteach (OBP) a d’ullmhaigh an doiciméad seo mar áis do Chomhaltaí Thithe an Oireachtais ina gcuid dualgas parlaiminteach. Ní bheartaítear é a bheith uileghabhálach ná críochnúil. Féadfaidh an OBP aon fhaisnéis atá ann a bhaint as nó a leasú aon tráth gan fógra roimh ré. Níl an OBP freagrach as aon tagairtí d’aon fhaisnéis atá á cothabháil ag tríú páirtithe nó naisc chuig aon fhaisnéis den sórt sin ná as ábhar aon fhaisnéise den sórt sin. Tá baill foirne an OBP ar fáil chun ábhar na bpáipéar seo a phlé le Comhaltaí agus lena gcuid foirne ach ní féidir leo dul i mbun plé leis an mórphobal nó le heagraíochtaí seachtracha. Disclaimer This document has been prepared by the Parliamentary Budget Office (PBO) for use by the Members of the Houses of the Oireachtas to aid them in their parliamentary duties. It is not intended to be either comprehensive or definitive. The PBO may remove, vary or amend any information contained therein at any time without prior notice. The PBO accepts no responsibility for any references or links to or the content of any information maintained by third parties. Staff of the PBO are available to discuss the contents of these papers with Members and their staff, but cannot enter into discussions with members of the general public or external organisations.
Pre-Budget 2020 PBO Commentary Contents 1 Summary of Key Messages 2 Section 1: Macroeconomic Overview 4 Section 2: Fiscal Policy Analysis 8 Economic Cycle 9 Public and Household Debt 10 Fiscal policy 12 Budgetary Strategy for Budget 2020 13 Fiscal Rules 14 Section 3: Macroeconomic and Fiscal Risks 15 Budgeting for a disorderly Brexit 15 Revenue volatility and unexpected Corporation Tax 16 Over-reliance on multinational corporations 20 Revenue concentration, base broadening and sustainability 22 Pre-Budget 2020 PBO Commentary Section 4: Analysis of Government spending 25 Placing the Growth Rate of Voted Spending in Context 25 Pay and Numbers 26 Capital Expenditure 30 Re-establishment of a Capital Reserve 31 Demographics 31 Supplementary Estimates 32 Brexit and Social Protection Expenditure 32 Appendix: Tax Strategy Group Papers 33
Pre-Budget 2020 PBO Commentary Summary of Key Messages 2 Set out below are the key messages that the PBO would like to bring to Members’ attention while they are preparing for Budget 2020. The economy continues to perform strongly, and fiscal policy in Budget 2020 should reflect this… Budget 2020 needs to be cautious to manage the risk of overheating and continue to address bottlenecks that are holding back growth (e.g. housing and infrastructure). In the first half of 2019: n GDP grew by 6.6%; and n Modified Domestic Final Demand grew by 2.3%. The tight labour market (unemployment rate in Q2 was 5.4%) and rising wages (grew by 3.3% in H1 2019) point to an economy which may face a risk of overheating in the short to medium-term. While debt sustainability has improved, the level of public debt remains high. The debt ratio fell to 64.8% in 2018. However, the ratio is nearly 40 percentage points higher when scaled by GNI* (a more suitable measure of the size of the Irish Economy). Changes to tax and spending introduced in Budget 2020 must be sustainable. A Budget 2020 package of €2.8bn is in line with growth in sustainable revenue sources. Any additional spending pressures should be offset by: n savings in other areas; n sustainable tax increases. Pre-Budget 2020 PBO Commentary Last year’s Supplementary Estimate for Health alone was €645 million. The current practice is to build such Estimates into the base (thereby increasing the expenditure ceilings). A similar request in November 2019 would absorb all the fiscal space currently projected for Budget 2020. Despite strong headline economic indicators, Budget 2020 should be considered in the context of key macroeconomic and fiscal risks… The Minister confirmed that Budget 2020 will assume a ‘disorderly’ Brexit. This means that spending pressures for some sectors may be greater than expected. In the context of the current fiscal space of €700 million, additional resources may be required to counter a disorderly Brexit (e.g. discretionary revenue raising measures). We emphasise that Budget 2020 should ensure that the public finances allow for the continued delivery of vital public services in the face of a disorderly Brexit. Revenue windfalls in Corporation Tax have been a recurrent feature of the public finances (i.e. revenue has been higher than expected). These windfalls were used to fund overspends (particularly in Health). Revenue windfalls should not fund permanent spending increases, as they may fail to re-appear in future years. Windfall revenues (since 2015) have improved the headline fiscal position. We estimate the primary balance is now 1.3 percentage points higher, and the debt to GDP ratio is 4 percentage points lower, as a result of these windfalls.
Pre-Budget 2020 PBO Commentary Budget 2019 suggested that some excess Corporation Tax would be set aside for the Rainy Day Fund. Corporation Tax has continued to outperform by €1.8bn for 2018, and by €314m by end-August 2019. However, projected allocations to the Fund have not changed since Budget 2019. If the intention is to put some windfall revenue into the Fund, the projected allocation for 2019 should increase. The concentration of economic activity and tax receipts around few multinationals is a risk. We estimate that if one 3 large multinational left Ireland, it would reduce Government revenue by around €440m, and lead to a reduction of 2% in Gross Value Added. This potential revenue loss includes both direct and indirect taxation. For context, this revenue loss is roughly the same as a €20 increase in the Carbon Tax (€430m) or a 1% increase in the higher-rate of Income Tax (€347m). There is scope for broadening the tax base in Budget 2020. Employees of multinational companies pay a quarter of all income tax and USC, while roughly 8% of tax-payers (those earning €90,000 and above) pay half of all receipts. There was potential to broaden the tax base in recent years (e.g. re-value the Local Property Tax and increase the Carbon Tax). The fact that this was not done represents a missed opportunity. Last year, Voted expenditure grew faster than the fundamentals of the economy. With growing risks, cautious fiscal planning in Budget 2020 and beyond is needed to protect the public finances… Public sector pay policy is nearing a critical point. The number of public servants is now higher than the pre-crisis peak. Spending on pay and pensions is also rising. This means that the average cost to the Exchequer per public servant is rising. This should be monitored in 2020 and beyond. During the economic and fiscal crisis, a disproportionate amount of cost-cutting fell on capital investment rather than day to day spending. This may reflect a bias towards capital when government spending is being cut. This should not be repeated in the future. The PBO has estimated the cost of increased unemployment due to a disorderly Brexit. We estimate that a disorderly Pre-Budget 2020 PBO Commentary Brexit could increase jobseekers’ spending by €104m in 2020. This would rise to €925m by 2029.
Pre-Budget 2020 PBO Commentary Section 1: Macroeconomic Overview 4 Ireland continues to experience strong growth in economic activity. Gross Domestic Product (GDP) grew by 6.6% in volume terms in the first half of 2019. This is significantly higher than average growth across the EU which was 1.4% in the first half of the year. Both the multinational and domestic sectors grew in the first half of 2019. Modified Domestic Final Demand (which is a proxy for growth in the domestic economy1) grew by 2.3% in the first half of 2019. This was slightly weaker than last year (4.7%) although this relative slowdown is expected given that Ireland is now at a late stage of the economic cycle2. Figure 1 below provides a breakdown of the contribution of Modified Domestic Final Demand and the remainder (net-exports, IP, aircraft leasing and stocks) to GDP growth. Overall, we can see that in recent years the majority of growth was driven by global as opposed to domestic activities. Figure 1: Contribution to GDP Growth 9% % 8% 7% 6% 5% 4% 3% Pre-Budget 2020 PBO Commentary 2% 1% 0% 2016 2017 2018 2019 YTD Modified Domestic Final Demand Remainder Source: CSO. Improvements in the labour market and wages (i.e. higher employment and lower unemployment) had a positive impact on consumer spending. In Q2 2019, consumer spending (in nominal terms) was 5% higher than the same period in the previous year. There are two drivers of consumer spending growth. The first is population growth, as it means there are more individuals buying items. The second is higher incomes which leads to more spending on a per capita basis. Overall, 38% of consumer spending growth last year can be attributed to demographics. 1 Modified Domestic Final Demand includes consumption (personal and government) and investment (excluding imports of Intellectual Property and imports relating to aircraft leasing activities). 2 This is when economic growth has reached its peak and is then starting to slow as capacity constraints and price pressures limit growth.
Pre-Budget 2020 PBO Commentary Modified Domestic Investment fell by 0.5% in the first half of 2019. This was driven by a fall in investment in machinery and equipment and intangible assets3 (excluding trade in IP) which was 9% lower in the first half of this year. Investment in construction on the other hand grew by 7.7% in the first half of this year. Although this was weaker than previous years (12.3% in 2018 and 15.3% in 2017). This may continue into 2019 as employment data for the construction sector was weak in the first half of the year. 5 Figure 2: Growth in Nominal Consumer Spending 7% % 6% 5% 4% 3% 2% 1% 0% 2014 2015 2016 2017 2018 2019 Remainder Demographics Figure 3: Gross modified capital formation (4 qma) 6,000 Million € 5,000 Pre-Budget 2020 PBO Commentary 4,000 3,000 2,000 1,000 0 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Machinery + Equipment + Intangible (excluding trade in IP) Construction Source: CSO. 3 Intangible assets includes intellectual property such as patents and copyrights.
Pre-Budget 2020 PBO Commentary On the labour market side, arguably the better area to help identify underlying trends in the economy, employment grew by 2.8% in the first half of 2019. The number of people working in Ireland is now 2.1% higher than its peak in 2007. While overall employment growth has been broad based across the various sectors, it was very concentrated regionally. Of the new jobs created in 2019, 61% were in the Greater Dublin Area while only 39% of the new jobs were created outside of the Greater Dublin Area4. 6 There are some signs that the labour market is tightening (i.e. job vacancies are harder to fill which leads to higher wages). The unemployment rate is now 5.4% (Q2 2019). In 2019, the monthly unemployment rate appears to show some stabilising as it has remained relatively steady around the 5% level. Furthermore, skills shortages in certain sectors of the economy have become apparent. For example, the proportion of employment growth which consists of occupations classified as “high-skill” reduced in 2018. 13,000 ‘high-skill’ jobs were created, compared to an annual average of 30,000 over 2015-2017. The tightening of the labour market has also been reflected in wages. In the first half of 2019, hourly wages increased by 3.3% in nominal terms and 2.3% in real terms (adjusted for inflation). The sectors that experienced the strongest wage growth were transport (7.5%) and administrative and support activities (7%). Wage growth in Ireland is now amongst the highest in the EU-15. With the economy now at full employment, it is likely that nominal wages will continue to grow at a strong pace in 2019. To assess the potential for the labour force to grow, it is worth looking at activity rates. The total labour force participation rate for prime age workers (age 25-49) has surpassed 2007 levels. Activity rates for women are higher than in 2007, while for men these are slightly below 2007 levels. There is still a significant gap between participation rates for men and women, but an increasing trend in female labour participation can be seen over the last 20 years, particularly for older age groups. Figure 4: Participation Rates Pre-Budget 2020 PBO Commentary 10 Difference 2017 Q1 vs 2019 Q1 (PP) 5 0 -5 -10 -15 -20 -25 -30 Total Male Female 15-24 25-49 50+ Source: Eurostat. 4 Greater Dublin Area consists of Dublin, Kildare, Meath and Wicklow.
Pre-Budget 2020 PBO Commentary Compared to 2007, the most notable facts are the sharp decrease in the activity rates for younger age cohorts, particularly for men, with younger people staying longer in education, and the increase in participation by older age groups. Overall, the potential to achieve further improvements in the Irish labour market (i.e. create more jobs) has become more limited. Inward migration seems to be the most likely way in which the capacity of the Irish economy can be 7 expanded, if the current rates of growth in the labour market were to be maintained. This is already the case, in 2018 45% of the new jobs were filled by non-Irish nationals. This is one of the highest shares in the EU (Figure 5). Figure 5: Employment Growth 2018 7% Difference 2017 Q1 vs 2019 Q1 (PP) 6% 5% 4% 3% 2% 1% 0% -1% Malta Cyprus Luxembourg Ireland Finland Spain Belgium Portugal Netherlands Slovenia Greece Denmark Sweden Croatia Latvia Lithuania Slovakia Austria Czechia EU UK Hungary Estonia France Italy Poland Romania Bulgaria Germany Foreign National Nationality of reporting country Pre-Budget 2020 PBO Commentary Source: Eurostat.
Pre-Budget 2020 PBO Commentary Section 2: Fiscal Policy Analysis 8 From a macroeconomic viewpoint, fiscal policy has two main functions: n Stabilising the economy: Government influences the economy through spending and taxation. Increasing taxation and lowering public spending (i.e. contractionary fiscal policy) will slow down economic activity during boom periods. Conversely, increasing spending and lowering taxes (i.e. expansionary fiscal policy) will support economic activity in a recession. n Ensuring the strength and sustainability of the public finances:public spending should be efficient (i.e. public services are provided in a cost-effective way) and effective (i.e. the policy delivers the desired outcomes), and it should increase in a sustainable way. The tax base should be broad and based on stable sources of tax revenue. In this section we analyse how fiscal policy is managed. The PBO emphasise the importance of managing the public finances in a prudent manner during periods of economic growth. We should learn from the past and avoid future cuts to public services and capital spending. We need to be prudent now and have sustainable revenues, so that we can afford to spend more in a downturn. To analyse how fiscal policy is managed, we must be aware of: n the current cyclical position of the Irish economy (generally identified by the sign and size of the output gap5) n challenges to the State’s long-term fiscal sustainability (proxied by the path of the debt-to-GDP ratio) n important risks to the economic and fiscal outlook. We examine the risks in the next section. In this section, we focus on the analysis of the Irish economic cycle and debt Pre-Budget 2020 PBO Commentary sustainability. 5 The output gap is the main indicator used to measure the current state of the economy. The output gap is the difference between the actual output being produced and its potential/sustainable level. When the output gap is positive, actual output exceeds potential output and the economy is assessed to be at risk of overheating. Alternatively, when the output gap is negative, there is spare capacity (i.e. high unemployment) in the economy.
Pre-Budget 2020 PBO Commentary Economic Cycle Figure 6: PBO’s assessment of the economic cycle 5 % 4 3 9 2 1 0 -1 -2 -3 -4 -5 2005m1 2005m6 2006m1 2006m6 2007m1 2007m6 2008m1 2008m6 2009m1 2009m6 2010m1 2010m6 2011m1 2011m6 2012m1 2012m6 2013m1 2013m6 2014m1 2014m6 2015m1 2015m6 2016m1 2016m6 2017m1 2017m6 2018m1 2018m6 2019m1 2019m6 Source: PBO own analysis. Note: Estimates > 0 point to a risk of overheating, while estimates < 0 indicate that the economy is underperforming. Figure 6 presents a range of estimates produced by the PBO for the underlying trends in the Irish economy. These estimates are based on models that use information on several economic variables that are available on a monthly basis. This can support a timelier analysis of recent macroeconomic developments (i.e. before statistical National Accounts are released). Our assessments are informed by developments in different areas of the economy such as the labour market, prices, consumer spending, housing market and financial markets. We exclude data distorted by the activities of foreign-owned multinational enterprises. Pre-Budget 2020 PBO Commentary The range of estimates, which reflect information available up until June 2019, suggest that the economy is currently operating above trend, meaning that if this continues, the Irish economy may be at risk of overheating. Despite this, the risk of overheating is still significantly lower by comparison to 2006/2007.
Pre-Budget 2020 PBO Commentary Figure 7: Output Gap estimates from relevant forecasting bodies 3.0 % of Potential GDP 2.5 2.0 10 1.5 1.0 0.5 0.0 -0.5 -1.0 2018 2019 2020 Department of Finance IFAC IMF OECD European Commission Source: Department of Finance, IFAC, IMF, OECD and EC. Note: Estimates > 0 point to a risk of overheating, while estimates < 0 indicate that the economy is underperforming. Assessments of the Irish economic cycle produced by other relevant bodies such as the Department of Finance, the Irish Fiscal Advisory Council (IFAC), IMF, OECD and the European Commission (EC), are in line with the PBO’s assessment. These bodies estimate a positive output gap for 2019, with higher estimates (which would point to a higher risk of overheating) for the OECD and EC, and lower estimates for domestic bodies. It must be noted that these assessments are surrounded by great uncertainty. Measuring the economic cycle is difficult, particularly for a small and globalised economy like Ireland.6 Pre-Budget 2020 PBO Commentary Public and Household Debt The level of public debt in Ireland rose dramatically during the financial and economic crisis of 2008. The government debt-to-GNI* ratio peaked at 166% in 2012 from a low of 27.7% in 2006. From that point on, debt sustainability has improved, and the debt ratio has reduced to 104% in 2018 (and it is projected to continue falling). The improvement in debt sustainability can be observed by comparing Ireland’s performance to other EU Member States. Ireland was below the interquartile range (i.e. the difference between first (holding 25% of the values) and third quartile (75% of the values)) of Government debt as a percentage of GDP of EU Member States between 2002 and 2007. Ireland’s government debt is measured as a percentage of GNI*. Since 2010, Ireland is above the interquartile range of EU Member States, highlighting how high Ireland’s debt is relative to most EU Member States. 6 For an introduction to these concepts see PBO Briefing Paper “Potential Output, the Output Gap and Associated Key Issues for Fiscal Policy-making in Ireland” and “A Primer on Economic Overheating”.
Pre-Budget 2020 PBO Commentary The impact on debt of increasing interest rates will likely be limited as average long-term maturity on Irish debt is 10 years. Despite this, the high level of public indebtedness, compared to the pre-crisis period, limits the room for movement for fiscal policy in the event of a future downturn as Ireland won’t be able to borrow to the same extent as it did in the past. Ireland’s household debt-to-income ratio was 133% in 2017 which is higher than in other EU countries. Ireland is above 11 the interquartile range of EU Member States for every year between 2002 and 2017. However, the financial situation of households has been improving greatly since 2011 as incomes are higher and households have paid back a significant amount of debt. Figure 8: Government Debt (% GDP for Interquartile Range of EU Member States and %GNI* for Ireland) 180 % of GDP 160 140 120 100 80 60 40 20 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Interquartile range of EU Member States Ireland Pre-Budget 2020 PBO Commentary Figure 9: Household debt to Income ratio 250 % of gross disposable income 200 150 100 50 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Interquartile range of EU Member States Ireland Source: Eurostat.
Pre-Budget 2020 PBO Commentary Fiscal policy Figure 10 analyses Irish fiscal policy by comparing growth in current revenue and primary current spending. During the pre-crisis period, revenue and spending grew at an unsustainable rate. When the crisis happened, tax revenue collapsed immediately, while spending continued to increase for some time. This was due to increased income supports as people lost their jobs, and to the intrinsic inflexible nature of day to day government spending (i.e. 12 spending reductions are politically difficult and take some time to take effect). Growth in revenue exceeded growth in spending during the period of fiscal consolidation. Consolidation concentrated on the spending side through cuts to capital and public sector pay and numbers. In recent years, the gap between spending growth and revenue growth closed, with growth in spending aligned to growth in tax revenue. This is more evident if we exclude windfall corporation tax (CT) receipts from total revenue. In principle the fact that spending growth is in line with revenue growth may not be an issue, however this must be considered in the context of an increased reliance on windfall CT receipts which may not be available in the future. Since Budget 2016, unexpected CT receipts have been the main factor explaining higher-than-expected tax revenue. This, along with an expenditure rule (the EU Expenditure Benchmark7) that fails to sufficiently constrain government expenditure, has created the context for increases in spending beyond what was planned. Figure 10: Fiscal policy in Ireland 20 Year-on-year % change 15 10 5 0 Pre-Budget 2020 PBO Commentary -5 -10 -15 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Current Revenue Total Current Expenditure, excluding interest Revenue excluding CT windfall from 2015 Source: PBO based on European Commission data. Overall, the budget position has improved overtime and a budget surplus was achieved in 2018. This is primarily the result of a severe fiscal adjustment totalling approximately 20% of GDP that was carried out between 2008 and 2014. While the unsustainable spending increases of the pre-crisis period have not been repeated, spending increased in recent years and has matched revenue growth. The return to a balanced budget has also largely been supported by a buoyant economy, the unprecedented performance of Corporation Tax and continued reductions in debt interest payments. 7 A numerical fiscal rule of the Stability and Growth Pact which limits year-on-year real growth in public expenditure to the medium-term potential growth rate of the economy.
Pre-Budget 2020 PBO Commentary Budgetary Strategy for Budget 2020 In the June Summer Economic Statement (SES), Government highlighted that the Irish economy is in a very challenging situation with the risk of overheating on one side, and the potential for a no-deal Brexit on the other. Debt reduction and the pursuit of prudent budgetary policy to generate budget surpluses were the main fiscal policy objectives outlined by Government. 13 The SES 2019 set out two different scenarios for the public finances. Scenario A, based on an orderly exit of the UK at end-2020, and scenario B, based on a disorderly Brexit. The budgetary stance, however, appears to be the same across both scenarios. Scenario B can be understood as Scenario A incorporating the impact on the general government balance of a disorderly Brexit, which is expected to materialise through lower tax revenue, and increased spending on social supports. The total planned budgetary package for 2020 is €2.8 billion, which is consistent with a headline surplus of 0.4% of GDP (under an orderly Brexit scenario). However, some €2.1 billion has already been committed. Table 1 below outlines how the fiscal space for Budget 2020 is allocated. Table 1: Fiscal Space for 2020 Indicative Breakdown € billions (unless stated) 2020 A Reference rate. % 4.7 B Convergence margin, percentage points 2.9 C Expenditure Benchmark (EB) in real terms, % (a-b) 1.8 D GDP deflator, % 1.9 E EB in nominal terms, % (c+d) 3.7 F Corrected expenditure aggregate year before 78.8 Pre-Budget 2020 PBO Commentary G Gross fiscal space under EB (e*f/100) 2.9 H Non-indexation of tax System 0.6 I Adjusted fiscal space (g+h) 3.5 J Pre-committed expenditure measures 2.1 Demographics: €0.5 billion, Public Service Stability Agreement: 0.4 billion, Carryover of Budget 2019 measures: €0.3 billion; Capital/NDP: €0.7 billion (€1.1 Capital smoothed) Expenditure reserve for 2020: €0.2 billion K Rainy Day Fund 0.5 L Net fiscal Space to be allocated on Budget day 0.7 Source: PBO based on SES 2019.
Pre-Budget 2020 PBO Commentary Overall, a budget package of €2.8 for Budget 2020 is in line with the growth in sustainable tax revenue sources. If additional spending pressures materialised, these would have to be offset by savings in other areas (this could be based on the work of the spending review process) or through increases in stable and sustainable tax revenue. 14 Fiscal Rules Ireland’s fiscal policy has to be in line with a set of EU fiscal rules. In terms of compliance with these rules, the EU Commission assessed8 that Ireland is expected to be compliant with the required adjustment path towards the medium- term budgetary objective (MTO)9 in 2019 (Ireland did not meet the MTO in 2018, and therefore an improvement in the Structural Balance is needed for 2019). The Expenditure Benchmark (the spending rule) assessment also points to compliance in 2019. The MTO is projected to be achieved again in 2020. Ireland is also expected to comply with the debt rule as the debt-to-GDP ratio is forecast to remain on a stable reduction path. Using their ‘principles-based approach’ (which relies on alternative estimates of the output gap produced by the Department of Finance), IFAC estimates10 that the MTO was met in 2018, despite the significant deterioration in the Structural Balance. They also point to an excessive spending growth for 2018 with a breach of the Expenditure Benchmark (calculated using the principles-based approach). For 2019, net spending (excluding interest payments) is expected to grow at a lower rate than the spending limit, assuming spending overruns will not materialise. One limitation of the fiscal rules is that the unprecedented levels of Corporation Tax receipts are improving the underlying budgetary position (i.e. the structural balance), as there is no correction for the portion of CT receipts that cannot be explained by economic developments (i.e. the adjustment for the output gap). Policy-makers should be aware of this aspect. Pre-Budget 2020 PBO Commentary 8 European Commission, Assessment of the 2019 Stability Programme for Ireland. 9 The MTO is a target level for the structural or underlying Government Budget position. It is country-specific and seeks to consider the longer-term sustainability of the public finances. Ireland’s MTO is currently a Structural Budget Balance of -0.5% of GDP. 10 Irish Fiscal Advisory Council, Pre-Budget 2020 Statement.
Pre-Budget 2020 PBO Commentary Section 3: Macroeconomic and Fiscal Risks 15 Budgeting for a disorderly Brexit Budget 2019 was based on an orderly Brexit. In our analysis of that budget,11 we emphasised that this may not be sensible, given the substantial uncertainty surrounding Brexit at that time. This uncertainty persists ahead of Budget 2020. However, the Government’s central scenario for Budget 2020 has changed. The Minister for Finance and Public Expenditure and Reform has confirmed12 (in September 2019) that Budget 2020 will now assume a ‘no-deal’ (or disorderly) Brexit. This implies that spending pressures may be substantially greater than anticipated at the time of the Summer Economic Statement13 (in June 2019), which detailed €700 million in unallocated fiscal space. We estimate the level of Brexit related funding included in Budget 2019 (prepared under the assumption of an orderly Brexit) to be between €92 and €170 million.14 As the operating assumption has changed to that of a disorderly Brexit, additional supports (beyond what was initially planned) may be required. In the context of the current €700 million fiscal space, this means that additional revenue raising measures may be necessary. In the event of a disorderly Brexit, the Summer Economic Statement predicts a nominal deterioration in the General Government Balance of €6.5bn. Relative to a baseline scenario of an orderly Brexit, this is a deterioration from 0.4% of GDP, to between -0.5% and -1.5% of GDP (see Figure 11). However, there is great uncertainty to this, and the fiscal impact could be stronger than expected. Pre-Budget 2020 PBO Commentary This deterioration would arise due to higher spending pressures (e.g. on more substantial Brexit supports and greater social welfare payments) and lower tax revenue (as revenues fall alongside lower economic growth prospects).15 In a forthcoming publication, we find a potential increase in jobseekers expenditure (Jobseekers Allowance and Jobseekers Benefit) of up to €104m in 2020, increasing to €925m by 2029, following a disorderly Brexit. We emphasise that Budget 2020 should ensure the public finances allow for the continued delivery of vital public services in the face of a disorderly Brexit. 11 Budget 2019 – Issues for Members of the Houses of the Oireachtas, Parliamentary Budget Office, 22 October 2018. 12 Minister Donohoe announces Budget 2020 Strategy, Department of Finance Press Release, 11 September 2019. 13 Summer Economic Statement, Government of Ireland, June 2019. 14 Tracing Brexit Related Exchequer Expenditure – Budget 2019, Parliamentary Budget Office, 17 June 2019. 15 The Central Bank predicts a fall in GDP growth to 0.7%, should a disorderly Brexit materialise. See Central Bank of Ireland Quarterly Bulletin QB3 – July 2019.
Pre-Budget 2020 PBO Commentary Figure 11: Impact on the General Government Balance of Disorderly Brexit 1.5 % of GDP 1.0 16 0.5 0.0 -0.5 -1.0 -1.5 -2.0 2020 2021 2022 2023 2024 GGB under orderly Brexit Indicative GGB (mid point) GGB min Brexit Impact GGB max Brexit Impact Source: PBO based on SES 2019. Revenue volatility and unexpected Corporation Tax Tax revenue instability has been increasing since 2014. This reflects a shift in the composition of the tax base, away from relatively stable taxes (such as Income Tax, VAT and Excise Duty), with a larger share of revenue coming from Corporation Tax (CT) and Capital Taxes. CT revenue now accounts for a greater proportion of Exchequer revenue than at any time in the history of the State (at Pre-Budget 2020 PBO Commentary 19% as of 2018). Figure 12 shows the ratio of CT receipts, to receipts from Income Tax, VAT and Excise Duty (traditionally more stable sources of revenue). As shown, since 2015 CT has exceeded Excise Duty and has increased considerably relative to VAT and Income Tax. This trend was last seen before the onset of the economic and fiscal crisis in 2008. However, the ratios for VAT and Excise Duty in particular, are far in excess of their pre-crisis levels.
Pre-Budget 2020 PBO Commentary Figure 12: Ratio of Corporation Tax to Income Tax, VAT and Excise Duty, 1984-2018 2.0 1.8 1.6 1.4 17 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Income Tax VAT Excise Duty Note: This graph shows the ratio of Corporation Tax revenue to revenue from Income Tax, VAT, and Excise Duty. When the line trends above 1, Corporation Tax revenue exceeds the revenue from the tax in question. Since 2015, Corporation Tax has grown significantly versus Excise Duty. Source: PBO analysis of tax revenue data from Department of Public Expenditure and Reform Databank. CT revenue has also proven difficult to predict. Receipts have consistently outperformed forecasts in recent years,16 and revenue surprises have been a recurrent feature of the public finances (particularly since 2015). In turn, these revenue surprises have been used to fund overspends, particularly in the Health Vote. We emphasise that unexpected or windfall revenue should not be relied upon to fund long-term or permanent spending. Vital public services should instead be funded by reliable and sustainable sources of revenue. This would help to avoid Pre-Budget 2020 PBO Commentary large cuts in the delivery of important services in the event that this revenue fails to re-appear in future years. In particular, the OECD’s BEPS 2.0 risks adding uncertainty to an already volatile and unpredictable revenue stream. Specifically, proposals to allocate shares of taxable profits based on the location of a company’s sales or users, could be detrimental to Ireland, as a small export intensive economy. These proposals would allocate a larger proportion of profits to larger countries. In addition, the proposal for a global minimum effective tax rate, could also undermine Ireland’s competitive advantage in attracting foreign direct investment. CT revenue windfalls have had a sizeable impact on the headline fiscal position since 2015. In terms of magnitude, as shown in Figure 13, we estimate windfalls of approximately: 17 n €2.3 bn for 2015 (34% of total CT receipts); n €2.4bn for 2016 (33% of total CT receipts); n €2.9bn for 2017 (35% of total CT receipts); and, n €4.2bn for 2018 (41% of total CT receipts). 16 See an analysis of Corporation Tax forecast errors in: An Overview of the Corporation Tax Base in Ireland, Parliamentary Budget Office, 9 July 2019. 17 Using a similar approach in their June 2019 Fiscal Assessment Report, IFAC estimates unexpected CT revenue for 2016, 2017 and 2018 at: €2.3bn, €2.9bn and €4.7bn respectively.
Pre-Budget 2020 PBO Commentary Figure 13: Corporation Tax windfalls, 2015-2018, €m €12,000 €10,000 18 €8,000 €6,000 €4,000 €2,000 0 2015 2016 2017 2018 Windfall Corporation Tax Note: This graph shows our estimates of the size of Corporation Tax windfalls from 2015-2018. The windfall for 2015 is calculated as the difference between the Department of Finance’s forecast and the actual outturn for that year. For projections for 2016 to 2018, we use the forecast of 2015 as a base, and grow this base in line with the growth rate of a suite of macroeconomic variables (GDP, GNI* and GOS), using estimated elasticities. In effect, this is the level of CT that might be expected to prevail in each year, given underlying economic conditions. Windfalls are then calculated as the difference between the actual Corporation Tax amount, and our projected amount, for each year. We can see the extent to which these windfalls flatter the primary balance in Figure 14. When windfall revenues are removed from General Government revenue, the primary balance is negative in 2015 and remains below the actual primary balance by an average of 1 percentage point, out to 2018. We can also observe the implications of these CT windfalls for the trajectory of the debt-to-GDP ratio, via their impact Pre-Budget 2020 PBO Commentary on the primary balance. As shown in Figure 15, the debt-to-GDP ratio is higher and falling at a slower pace, once windfall revenues have been removed. Unexpected revenues have flattered the headline fiscal position. Corporation Tax windfalls have improved the primary balance by an average of 1 percentage point (since 2015), and have enabled a 4 percentage point reduction in the debt-to-GDP ratio, as of 2018.
Pre-Budget 2020 PBO Commentary Figure 14: Counter-factual trajectory of the primary balance (as % of GDP), without Windfall CT revenue, 2014-2018 2.0% 1.5% 19 1.0% 0.5% 0% -.5% 2014 2015 2016 2017 2018 Primary Balance (% of GDP) Primary Balance (% of GDP), without “windfall” Note: This graph shows a counter-factual trajectory for the primary balance (as a % of GDP) from 2014, once the estimated windfall portion of Corporation Tax revenue has been subtracted from General Government revenue. This is a static analysis that holds all other factors constant, and assumes no alternative policy actions over the period. Figure 15: Counter-factual trajectory of Debt to GDP ratio (%), without windfall CT revenue, 2014-2018 105% 100% 95% 90% Pre-Budget 2020 PBO Commentary 85% 80% 75% 70% 65% 60% 2014 2015 2016 2017 2018 Debt to GDP ratio Debt to GDP ratio, without windfall Note: This graph shows a counter-factual trajectory for the debt to GDP ratio from 2014, once the estimated windfall portion of Corporation Tax revenue has been subtracted from General Government revenue. This is a static analysis that holds all other factors constant, and assumes no alternative policy actions are taken over the period. We use a streamlined approach to modelling public debt, where the debt to GDP ratio is assumed to evolve according to the (1+it ) dt = d(t-1) - pbt + ft following specification: (1+gt) , where dt represents the debt to GDP ratio in year t, dt-1 represents the debt to GDP ratio in year t-1, it represents the interest rate on public debt, gt represents the nominal growth rate of GDP, pbt represents the primary balance over GDP, and ft represents stock flow adjustments over GDP. See European Commission Debt Sustainability Monitor 2017.
Pre-Budget 2020 PBO Commentary To manage the risks associated with these windfall revenues, Budget 2019 suggested that some excess CT would be set aside for allocation to the Rainy Day Fund. The PBO has emphasised that this would be a sensible policy response in managing windfall receipts. However, while Corporation Tax has continued to outperform, the projected allocations to the Rainy Day Fund set out 20 in June’s Summer Economic Statement are unchanged since the last budget (and since last year’s Summer Economic Statement). The annual allocation has remained at €500m, beginning in 2019. This is despite an outperformance of CT versus forecast for 2018 of €1.8bn, and that CT receipts collected by end- August 2019 are 6.8% (or €314m) more than expected.18 If the intention is to put some windfall receipts into the Rainy Day Fund, this would imply a higher allocation for the Fund for 2019. If windfall revenues are not set aside for allocation to the Rainy Day Fund, an alternative approach would involve using this revenue to reduce the amount of public debt.19 Generally, this analysis points to the need to find more stable and sustainable revenue streams (rather than volatile windfall revenue) to fund important public services. Over-reliance on multinational corporations In terms of productivity and wages, foreign firms continue to outperform domestic firms (including on a within-sector basis). As of 2017 foreign owned MNCs account for approximately:20 n 77% of Corporation Tax receipts; n 25% of all Income Tax (PAYE) and USC receipts; n 39% of Gross Value Added (GVA);21 n 22% of employments; and, Pre-Budget 2020 PBO Commentary n 34% of gross earnings. This concentration of economic activity around few multinational corporations (MNCs) is a risk to the State’s macroeconomic and fiscal stability. It exposes domestic output, employment and Exchequer revenue, to firm and sector specific shocks, and to international factors that are largely beyond domestic control. In light of this risk, we have modelled the impact on the Irish economy and the Exchequer, of a typical large MNC exiting Ireland (our approach updates a previous analysis by IFAC in their Fiscal Assessment Report for June 2018).22 18 Revenue Receipts: January to August 2019, Parliamentary Budget Office, 9 September 2019. 19 IFAC have called for the establishment of a Prudence Account, with unexpected CT revenue being allocated to the account during the year to prevent it from being used to meet overspends. At the end of the year, this revenue might then be transferred to the Rainy Day Fund or used for debt reduction. 20 Corporation Tax 2018 Payments and 2017 Returns (May 2019) and CSO. 21 This figure rose to 42.4% for 2018. 22 See Box C of IFAC’s Fiscal Assessment Report June 2018 for a more detailed explanation of the approach and underpinning assumptions. The Revenue Commissioners provide data on Corporation Tax (CT), Income Tax/USC, earnings, employment etc. for the top 100 MNCs. However, for the ten largest firms overall, only the amount of CT paid is provided. IFAC develop a stylised firm, based on the ratio of the average CT paid by a top ten firm to a top 100 MNC. It is assumed that this ratio also holds in terms of average Income Tax/USC paid, average gross earnings etc. The stylised firm is then formed by scaling up these averages in line with the ratio of CT paid.
Pre-Budget 2020 PBO Commentary Using data from the Revenue Commissioners23 and the CSO, we estimate that a typical large MNC exiting Ireland would reduce revenue by approximately €440m (in terms of reduced Corporation Tax, Income Tax, USC, employer’s PRSI and the VAT paid by the firm). For context, this represents approximately 0.7% of General Government revenue. In terms of spending, this loss can be seen as approximately equal to: 21 n an increase in Carbon Tax by €20 per tonne (€430m); n an increase of 1% in the 13.5% or 23% VAT rates (€337m or €493m respectively); or, n an increase of 1% in the higher-rate of Income Tax (€347m).24 Around €323m of this loss is due to a reduction in CT alone. Indeed, CT receipts are heavily concentrated around MNCs. As shown in Figure 16, MNCs dominate the CT contributions of almost every sector (particularly in Manufacturing, Financial and Insurance Activities, and Information and Communications). In addition to a sizable fiscal impact, the loss of a typical large MNC would have a detrimental impact on the State’s macroeconomic condition. Specifically, we estimate job losses of four to five thousand, and a loss in net earnings of approximately €129m, with a 2% reduction in Gross Value Added (representing a reduction of approximately 5% of multinational Gross Value Added). Our simulation focuses on the potential impact of a single large MNC leaving the State. However, it is reasonable to assume that the nature of any shock that would cause a single MNC to exit, would also impact on other firms. For example, the implications of adverse changes in the international tax environment (such as those included in the OECD’s BEPS initiatives), or a deterioration in trading conditions, would not be limited to a single firm. In addition, MNCs can tend to exhibit herd-like behaviour when making a location decision. In effect, this means that a larger firm can influence the location decision of others. There are also benefits for firms in co-locating with others (i.e. spatial agglomeration) that might incentivise the outflow of multiple firms in response to the exit of an industry leader. Pre-Budget 2020 PBO Commentary Our analysis is limited to the direct macroeconomic and fiscal impact of a single MNC exiting. Of course, it does not consider wider fiscal or socio-economic impacts that would inevitably arise (e.g. higher social welfare spending, and the wider societal costs of unemployment). This likely places our estimates on the conservative side. 23 Corporation Tax 2018 Payments and 2017 Returns (May 2019). 24 Based on costings provided in the Department of Finance’s Budget 2020 Tax Strategy Group Papers.
Pre-Budget 2020 PBO Commentary Figure 16: Corporation Tax receipts by company type, 2017 2500 € Millions 2000 22 1500 1000 500 20 21 1931 1487 1457 533 429 379 0 Manufacturing Wholesale and Retail Trade Administrative and Support Services Information and Communication Transport and Storage Financial and Insurance Activities Construction Other Sectors Foreign MNCs Irish MNCs Non-MNCs Notes: This figure shows the Corporation Tax contribution of each sector, disaggregated by foreign/Irish-owned MNC, and non-MNC. Source: PBO analysis based on data from the Revenue Commissioners, 2019. Revenue concentration, base broadening and sustainability Pre-Budget 2020 PBO Commentary As discussed, Corporation Tax receipts are heavily concentrated around relatively few tax-payers, with receipts from the ten largest firms averaging 40% of total CT revenue since 2014 (see Figure 17), and 77% of total CT receipts coming from multinationals (as of 2017). However, there is also considerable concentration among Income Tax and USC receipts (see Figure 18). A quarter of Income Tax and USC revenue comes from the employees of multinationals, while approximately half of all Income Tax and USC receipts receipts (53%) come from just 8% of tax-payers (those earning €90,000 and above).25 On the other hand, approximately 43% of tax-payers (those earning less than €25,000) contribute just 2% of receipts. This highlights the high progressivity of the Irish tax system (i.e. those with higher incomes contribute proportionately more). The European Commission’s Country Specific Recommendations for Ireland for 201926 again refer to broadening the tax base. This would facilitate greater revenue stability. Changes to VAT introduced in Budget 2019, and the introduction of the Sugar Tax in Budget 2018 have gone some way to broadening the base. However, delays in re-valuing the Local Property Tax, and the decision to forgo increases in the Carbon Tax represent missed opportunities for further base broadening. 25 Based on 2017 data from the CSO, and the Revenue Commissioners. 26 Draft Country Specific Recommendations, Parliamentary Budget Office, 18 June 2019.
Pre-Budget 2020 PBO Commentary Figure 17: Share of top ten payers of Corporation Tax, €m, 2014-2018 16,000 € Millions 14,000 12,000 23 10,000 8,000 6,000 4,000 45% 2,000 41% 37% 39% 37% 0 2014 2015 2016 2017 2018 Top 10 Note: This graph shows the share of Corporation Tax revenue contributed by the top ten payers in each year, from 2014 to 2018. This highlights the concentration of Corporation Tax receipts generally. Source: Derived from An Overview of the Corporation Tax Base in Ireland, Parliamentary Budget Office (9 July 2019). Figure 18: Share of Income Tax and USC paid by income level (€), 2017 90,000+ 75,000 to 90,000 60,000 to 75,000 Pre-Budget 2020 PBO Commentary 40,000 to 60,000 25,000 to 40,000 Under 25,000 0% 10% 20% 30% 40% 50% 60% Share of Total Income Tax and USC Deducted (%) Share of Total Number of Income Cases (%) Note: This graph shows the share of total Income Tax and USC paid by income level, and the share of the total number of Income Tax cases by income level. Source: PBO analysis based on data from the CSO (September 2019). In addition, a relatively significant amount of tax revenue comes from the transport sector (e.g. excise duty on fossil fuels, carbon tax, Vehicle Registration Tax (VRT) and Motor tax etc). This revenue is currently based on taxing sources of energy which are not environmentally sustainable. The transition to a low-carbon economy, as re-stated in the Government’s Climate Action Plan, creates a challenge for the sustainability of the transport tax base.
Pre-Budget 2020 PBO Commentary Recent PBO research27 shows that Motor Tax revenue decreased from €843 million in 2014 to €714 million in 2018, and it is estimated to fall to €687 million by 2023 (due to consumers switching towards lower emitting cars that are subject to lower rates of taxation). If there had been no policy change in July 2008, when the basis of taxation was changed from engine size to CO2 24 emissions (counterfactual analysis), the difference between the estimated Motor Tax revenue based on cars taxed on their engine size and of the current system is €1.7 billion for 2008 to 2018. The difference is estimated to be €2.3 billion for 2019 to 2023. While these developments are beneficial for combatting climate change, consideration should be given as to how to replace this revenue stream. This will be necessary to ensure the continued delivery of vital public services when this revenue ultimately disappears. Pre-Budget 2020 PBO Commentary 27 PBO (2019), An Analysis of the Sustainability of Vehicle Registration and Motor Tax.
Pre-Budget 2020 PBO Commentary Section 4: Analysis of Government spending 25 General Government Expenditure is the key measure of overall government spending for the EU’s fiscal rules: n In 2019, 72% of this spending is made up of the voted current (day to day) spending approved by Dáil Éireann – following Committee scrutiny; n A further 10% is made up of non-voted current spending, and 9% is made up of voted capital spending; and, n The remaining 9% of General Government Expenditure is Non-Exchequer spending. The largest elements of day to day spending in 2019 are: n €19.8 billion in Public Sector Pay supports; n €18.7 billion in pay; and n €7.9 billion in non-pay spending by the HSE. Non-voted current spending is dominated by interest payments on the national debt and the EU budget contribution. Government has limited ability to impact these in any given year. These types of spending are sometimes described as non-discretionary. Non-voted current spending, which is difficult to influence, and voted current spending, which is tied to the level of public services, make up a significant share of General Government spending. This means that decisions during the annual budgetary process are limited in scope, and large changes in the composition of spending have proven difficult to make in the past.28 Pre-Budget 2020 PBO Commentary Placing the Growth Rate of Voted Spending in Context As Figure 19 shows: n From 2007 to 2010, Gross Voted Expenditure reduced at a lower rate than Modified Domestic Final Demand; n From 2011 to 2017, the rate of expenditure growth was lower than the growth rate of Modified Domestic Final Demand; n However, in 2018 growth in Gross Voted Expenditure exceeded growth in Modified Domestic Final Demand. A total of €1.2 billion of its €4.4 billion spending growth between 2017 and 2018 was unplanned. If there is another unplanned increase in spending on this scale, its growth rate in 2019 would be larger than that shown in Figure 19. 28 For a more detailed analysis of the constraints briefly described here see PBO Publication 26 of 2019, General Government Expenditure – How its composition constrains decisions about government spending.
Pre-Budget 2020 PBO Commentary Figure 19: Growth rate of Gross Voted Expenditure and Modified Domestic Final Demand (Current Prices), 2000-2023 25% 20% 26 15% 10% 5% 0% -5% -10% -15% -20% 2008 2006 2009 2000 2002 2004 2020 2003 2022 2005 2023 2007 2018 2016 2019 2001 2010 2012 2014 2021 2013 2015 2017 2011 Gross Voted Expenditure Modified Domestic Final Demand Gross Voted Expenditure (Forecast) Source: DPER Databank and CSO. Note: €0.8 billion of the growth in expenditure in 2018 related to the transfer of all domestic Water services funding to the relevant Vote. If this expenditure is excluded the rate of growth in 2018 is 6%, rather than 7%, but this remains higher than the MDD rate of growth. Gross voted expenditure growth is projected to stabilise at just over 3% per annum from 2019-2023.29 However, as the PBO has previously stated, the expenditure ceilings appear to be treated as the floor for expenditure expectations and are regularly exceeded.30 Pre-Budget 2020 PBO Commentary This provides the context for the gross voted expenditure issues which will be addressed in Budget 2020. Voted spending growth has recently exceeded economic fundamentals, and with growing risks, more sensible management in this area in the future is key to protecting the stability of the public finances and future public service delivery. Pay and Numbers In a previous publication31 the PBO concluded that “public sector pay policy is nearing a critical juncture”.32 This critical juncture was marked by three factors: 1. A general rise in the number of public servants beyond pre-crisis peaks; 2. The unwinding of cost reducing measures implemented under FEMPI; and 3. Calls for increased pay in general, and sector-specific pay awards to help deal with recruitment and retention issues. 29 Mid-Year Expenditure Report, p. 25. 30 Multiannual Expenditure Ceilings: An effective control for spending or simply the baseline, Parliamentary Budget Office. 31 Public Sector Pay and Pensions: Features and Key Determinants, Briefing Paper 8 of 2018. 32 Ibid, p. 5.
Pre-Budget 2020 PBO Commentary Since then, all three of these factors have had an increased impact on public finances. The number of public servants is now above the pre-crisis peak (see Figure 20). Expenditure on pay and pensions is now also rising at a faster rate than the number of current and former public servants, meaning that the average cost to the exchequer per public servant is rising. As Figure 20 shows, this is on a different (significantly smaller) scale than in the pre-crisis period. In addition, population 27 growth since the pre-crisis period means that the number of public servants relative to the population is still lower than its previous peak.33 However, it is worth tracking this change in the coming years. Figure 20: Public Service Numbers, and Public Service Pay and Pensions Expenditure (€bns), 2000- 2019 25 350,000 300,000 20 250,000 15 200,000 10 150,000 100,000 50 50,000 0 0 2008 2006 2009 2000 2002 2004 2003 2005 2007 2018 2016 2019 2001 2010 2012 2014 2013 2015 2017 2011 Pay and Pensions Expenditure (LHS) Public Service Numbers (RHS) Pre-Budget 2020 PBO Commentary Source: DPER Databank. Note: Does not include Local Authority numbers or other staff not paid directly by the Exchequer. As Figure 21 shows, the Health and Education Sectors account for most public sector workers. Following a period of overall expansion from 2000 (and earlier) to 2008, the government intentionally allowed the number of public sector workers to reduce as a cost-cutting measure during the economic and fiscal crisis. The number of public sector workers reached its lowest point in 2013. By Q4 2018, both the Health and Education Sectors were above their pre-crisis peak, while the rest of the public service has not yet reached that level. Primarily, this is a result of net decreases over the period in the Justice and Defence Sectors. 33 This share peaked at 6.5% in 2008 and is now 6.2% based on CSO estimates of the population in 2019.
Pre-Budget 2020 PBO Commentary Figure 21: Public Service Numbers, 2000, 2008, 2013 and 2018 140,000 120,000 100,000 28 80,000 60,000 40,000 20,000 0 Health Sector Education Sector Rest of Public Sector 2000 2008 2013 2018 Source: DPER Databank. Note: Does not include Local Authority numbers or other staff not paid directly by the Exchequer. Regardless of any policy change, public sector pay will continue to increase because of decisions already made: n the unwinding of the Financial Emergency Measures in the Public Interest (FEMPI) measures which impacts all sectors; and n the recently implemented New Entrant Equalisation Deal was designed to backload the additional expenditure – this has a cost of €75 million during the term of the Public Service Stability Agreement (PSSA) rising to a cost of €190 million by 2026.34 However, in Budget 2020, and the coming years, the government will face important expenditure policy decisions in many sectors. Pre-Budget 2020 PBO Commentary Health Sector In the Health Sector, there are outstanding issues that may impact on the level of spending on pay: n 2020 will be the first full year of costs arising from the pay deal agreed with nursing unions in February 2019; n Possible industrial action by Hospital Consultants to seek increased pay for post-2012 entrants;35 and n Recommendations to remove private practice from public hospitals may result in additional pay costs if implemented.36 In February, the estimated full year cost of the nursing pay deal was €35 million.37 However, the costs of the deal are currently significantly higher than anticipated, and the current estimated cost in 2019 is reported to be €39 million.38 Given this, these costs in 2020 are likely to be significantly higher than previously anticipated. 34 See ‘New Entrants’ Agreement’, 19 March 2019. 35 See ‘Warning of consultants’ industrial action over two-tier pay’, RTÉ, 11 September 2018. 36 See ‘Removing private practice from public hospitals will be costly, says Donohoe’, Irish Times, 26 August 2019. 37 ‘Nurses deal will cost €50m over two years’, Irish Examiner, February 12, 2019. 38 ‘Cost of nurses’ pay deal running millions ahead of estimate’, Irish Times, July 16, 2019.
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