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living in interesting times

Kitty Miv, Editor
23 September, 2019

As has become clear over the past several years, the UK population, and its neighbors in the European Union has fallen victim to the curse – commonly misattributed to the Chinese – of living in "interesting times".

Regardless of the origin of the saying, it can no doubt be agreed that times don't get much more interesting than this week, with eleven Supreme Court judges set to pronounce on the legality, or otherwise, of Prime Minister Boris Johnson's decision to prorogue Parliament, following hot on the heels of a similar judgment in Scotland which found the action to be unlawful, and designed to frustrate the ability of MPs to have their say on the matter.

In the face of this confusion, unresolved at the time of writing, life must go on, not least for the UK's nearest neighbor. In Ireland, on September 11, the Irish Finance Department revealed that given the lack of clarity regarding the timing and format that the UK's exit will take, and with the Budget just four weeks away, the Government has decided to formulate the Budget on the basis of a disorderly Brexit.

The Irish authorities have reported that they are committed to a budgetary package of EUR2.8bn, EUR2.1bn of which has been pre-committed to spending measures. This leaves about EUR700m for tax-side measures.

The Department said that the Government is taking a "twin-track" approach to the Budget. This involves funding services and making progress on particular policy areas and supporting sectors and regions most exposed to Brexit-related disruption.

Finance Minister Paschal Donohoe explained that: "A no-deal Brexit will have profound implications for Ireland on all levels. These include macroeconomic, trade, and sectoral challenges, both immediately and in the longer term. A crucial response is to build up our capacity to respond to the challenges."

According to a statement released by the Ministry of Finance, the key factors influencing the Irish government's actions were the need to "give certainty to businesses and citizens that the government is prepared for a no-deal Brexit and stands ready to support the economy in such a scenario".

The Ministry of Finance went on to stress the importance of stabilizing Ireland's public finances, observing that: "Given the uncertainty and lack of clarity regarding the timing and format that the UK's exit will take, preparing for a no-deal scenario is the most sensible approach."

It concluded by stating that: "Finally, is the need to avoid a situation in which decisions made in the Budget might need to be reversed in future. Assuming a no-deal Brexit ensures the government has the necessary resources at its disposal to meet the impact of this exceptional challenge, whilst preserving the longer-term sustainability of the public finances."

However, commenting ahead of the budget, the Irish Fiscal Advisory Council (IFAC) cautioned against the use of "volatile and unpredictable" corporation tax receipts to fund government "overspending".

In its pre-Budget statement, the watchdog noted that "corporation tax surges mean that receipts are at record levels and this has masked repeated spending overruns." It warned that "the practice of using corporation tax outperformances to achieve budget balance targets carries significant risks." As a volatile, highly concentrated, and unpredictable source of revenue, corporation tax is also "subject to potential reversals in future years, depending on firm-specific developments and changes to the global tax environment."

Corporation tax receipts made up a record 18.7 percent of the tax mix last year – a considerable increase on the 10.3 percent recorded in 2011. IFAC said that, of the EUR10.4bn corporation tax receipts received by the Government in 2018, "the annual gain from excess growth in corporation tax receipts" is estimated at around EUR3bn-EUR6bn.

IFAC noted that a further overperformance is expected for 2019 and urged the Government not to rely on these stronger than expected receipts to fund any overspending.

IFAC also pointed out that "potential changes to the international tax environment cast a shadow on Ireland's ability to continue to attract and retain foreign direct investment."

Meanwhile, speaking in mid-September, European Commission President Jean-Claude Juncker stated, to the surprise of no-one that has been following proceedings, that the UK Government has failed to put forward a workable alternative to the backstop arrangement included in the Brexit deal negotiated by Boris Johnson's predecessor Theresa May.

Juncker met with UK Prime Minister Boris Johnson in Luxembourg on September 16, 2019. According to a statement released by the European Commission after that meeting, Juncker recalled that it is the UK's responsibility to come forward with legally operational solutions that are compatible with the Withdrawal Agreement.

The Withdrawal Agreement, previously rejected by parliament, covered all issues concerning the UK's exit from the European Union.

One major sticking point for lawmakers that prevented endorsement of the previous package was the "backstop" arrangement, proposed by the EU, to avoid a hard border emerging between Northern Ireland and the Republic of Ireland to the south after Brexit. The EU has said that it cannot agree to a deal for an orderly Brexit that does not ensure that a hard border is not introduced between Northern Ireland and the Republic of Ireland.

Under the backstop arrangement, Northern Ireland would remain part of the EU customs area until such time as a workable solution was found. Because the backstop would remain indefinitely in the absence of a workable solution, members of parliament – and Brexit hardliners in particular – strongly opposed this element of the deal.

And now, if you'll excuse me, I'm off to publish before it all changes again. Until next week (maybe!)

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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