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Irish finance minister limits largesse as global tensions rise

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Ireland’s finance minister plans to limit spending increases and tax cuts in next year’s budget to avoid adding “fuel to the fire” of the country’s rapidly growing economy as it confronts the fallout from Brexit and global trade tensions.

Publishing the government’s summer economic statement on Tuesday, Paschal Donohoe told journalists that “excessive” spending growth could heighten risks to the country’s economic recovery as employment approached record levels.

Ten years after the financial crash that led to an international bailout for Ireland, Mr Donohoe set out an outline fiscal plan for 2019 that stressed the need to fortify public finances against shock.

His stance reflects an attempt to avoid a return of boom and bust in an economy forecast to grow by 5.6 per cent this year and by 4 per cent in 2019.

Mr Donohoe still plans a €3.4bn package of tax cuts and new spending next year, including €1.5bn for investment in housing and transport. But he will set aside €500m for a new “rainy day fund” and will forgo spending another €900m permitted under EU fiscal rules.

Monday, 18 June, 2018

“While the economic situation is relatively healthy at present, it is clear that a crucial policy response is to build up our capacity to respond to these challenges,” Mr Donohoe said.

The minister’s caution is an attempt to shape political debate in advance of a possible election this year or next, since the deal with the opposition Fianna Fáil that underpins the minority administration of Taoiseach Leo Varadkar expires in December. The 2019 budget will be published in October but will not clear parliament until December.

Several public bodies have warned that Ireland remains vulnerable to any economic turmoil from Brexit, tariff wars between the US and its trading partners, or volatility in the eurozone.

The state-backed Economic and Social Research Institute said in a report on Monday that the government should avoid any measures that would overheat the economy.

“There is little or no scope for cutting the overall tax burden, which would stimulate the economy further,” said Kieran McQuinn, research professor with the ESRI.

Mr Donohoe insisted he could still introduce modest income tax cuts in the budget, saying he would target a budget deficit next year of 0.1 per cent of gross domestic product and would not adopt measures that led to a larger deficit. The forecast deficit for 2018 is 0.2 per cent of GDP.

Asked why he would not run a surplus in 2019, Mr Donohoe said: “A choice could be made not to . . . put a deposit of half a billion euro into the rainy day fund and to try to use that funding for further improving our deficit position.

“The choice I’m making is to go ahead with the rainy day fund, not to spend that money . . . I won’t do anything that would jeopardise our ability to broadly balance our books and . . . improve our deficit position.”

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