A Budget Tale of Two Countries

With the Irish finance minister formally announcing a bonanza budget for the Irish people, the hard realities facing the UK ahead of its budget later this month stand in stark contrast.

Fiscal Tightness in the UK

While the Irish government has found itself awash with disposable cash, the UK’s Labour government finds itself in a tight corner with little fiscal headroom to cheer up hard-pressed consumers, with their lack of mobility exacerbated by self-imposed rules regarding tax and borrowing.

Taxation Challenges for the UK Government

Keir Starmer and Rachel Reeves have promised not to increase the main rates of tax – income tax, VAT, corporate tax, and national insurance – and to get debt falling as a share of national income in five years.

Speculation is mounting that they will be forced to target CGT, inheritance allowances and pensions to raise much-needed tax revenues. Any such measures will be in addition to the recent announcement of means-testing pensioners’ winter fuel allowances which has attracted a lot of flak from across the UK.

Ireland’s Strong Fiscal Position

At the other end of the economic spectrum, the Irish government budget is enjoying a record surplus, the country’s debt-to-GDP ratio is falling, bond yields in Ireland are well below those in the UK, and the economy is projected to grow by almost 3% next year – with implications for the cost of corporate borrowing and mortgage loans.

Ireland’s ‘Feel-Good’ Budget

While the General Election date has yet to be set, the Budget in Ireland has offered the government an opportunity to stimulate a ‘feel-good’ atmosphere – unsurprisingly, they have seized this with relish with a long shopping list of announcements.

Irish Government's Surplus and Spending Initiatives

Contrasting Economic Outlook: Ireland vs. UK

The recent cut in Eurozone interest rates has provided further cause for optimism that the Irish economy can bounce back from its weak GDP performance over the past year. The drop of headline inflation below the ECB’s target of 2% makes another interest rate cut increasingly likely. By contrast, ‘sticky’ inflation figures in the UK mean there was no pre-Budget rate cut present for the government.

The question that dogged the decision-makers in the Irish budget was exactly how much cash they could inject into the economy. They will be hoping that they have successfully tread the delicate tightrope of catalysing growth without overheating the economy.

The UK government has its eyes set on a similar outcome, but the worrying forecast of increasing national debt and an impending sense of doom radiating from the Chancellor indicates that this will be a much more difficult task. To have a chance at stimulating growth, they are likely to be forced to throw away their previous commitment and borrow money to invest in the long-term growth of the economy.