Families are to miss out on income tax cuts and social welfare increases next year as the Government lacks the firepower to fight the effects of a hard Brexit.

Finance Minister Paschal Donohoe is blaming Brexit for a ‘standstill’ Budget 2020 – but the State’s financial watchdog says the failure to control spending for the past three years has left the State “unnecessarily vulnerable”.

Ministers have agreed that the Budget will be prepared on the assumption that the UK will crash out of the EU.

As a result, the now annual €5 increase on social welfare payments will not happen.

Instead Mr Donohoe, in consultation with Fianna Fáil, will ‘target’ areas at risk of being worst hit by Brexit.

He will also have to hold some money back “due to a temporary increase in unemployment”. In relation to taxation, Mr Donohoe said he will announce a “set of very safe choices” on October 8 and ruled out reductions for anybody earning above the minimum wage.

However, in a devastating assessment, the Irish Fiscal Advisory Council (IFAC) said that the country is in this situation because “we haven’t done the right thing in the good times”.

The fiscal council believes Ireland could face a large Budget deficit in the wake of a no-deal Brexit.

Members told the Oireachtas Budgetary Oversight Committee that Brexit could lead to “severe budgetary costs” because of falling taxes and rising unemployment-related expenses.

It was also noted that the Government’s rainy day fund is not adequate and similar mistakes that were made pre-2008 recession are being made again.

IFAC’s Michael Tutty said the Government’s spending strategy in recent years means “we have nothing built up as yet because the surpluses weren’t realised”.

He said the advice for “the last three years at least” was to run budget surpluses, but these had not been realised because of cost overruns in areas like health.

“The opportunities were there, the projections were there, but in practice it just didn’t happen,” he said.

Mr Tutty, a former senior Department of Finance official and vice-president of the European Investment Bank, added: “We are back to where we’ve been in the past and hopefully when we get through any slowdown that might occur people will realise that the fiscal council was right – that we should build up the money in the good times.”

The Finance Minister disputed the assessment, insisting there is a “well-managed economy” that can withstand a shock.

He said there are many “who would argue” that he should be introducing tax cuts as a stimulus before Brexit because the economy is still growing.

“For Brexit, I’m not going to do that,” he said.

“I am going to make a set of very safe choices in relation to taxation and I am confident that even with the different pressures we will have to deal through the year, that we will deliver our surplus.

“I want to ensure that we are maximising the resources that are available to help citizens, families and communities that could find themselves dealing with real change as a result of a no-deal Brexit taking place.”

Negotiations between Mr Donohoe and Fianna Fáil on the Budget package began earlier this week with a setting out of the monies available.

The Government expects to have €2.8bn extra available next year due to continuing growth.

However, €2.1bn of this has already been pre-committed to expenditure measures including public sector pay increases.

As a result Mr Donohoe will have €700m for new tax initiatives and spending increases.

Ministers will be pitching for their share of the money in the coming weeks with sizeable demands inevitable for health, housing and childcare packages.

The Government is prepared to shift from running a surplus to having a deficit in a no-deal scenario.

The country could have to borrow up to €4.5bn to mitigate the impact of Brexit, including bailouts for some industries like agriculture.

Fianna Fáil’s finance spokesman Michael McGrath told the Irish Independent he accepts that tax cuts cannot happen in 2020.

“There will be people disappointed but I think not having income tax cuts is an unavoidable consequence of the situation we’re in,” he said.

“I think the minister had no choice really but to opt for assumption of no-deal Brexit.

“If it does come to pass, then we’ll be in a very, very serious situation very quickly.”

Mr McGrath said his party will try to “protect living standards and ensure the most vulnerable are not the first to suffer”.

“It’s going to be a challenge. We’ll have to see closer to the time what resources are available,” he said.

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