This week’s corporation tax figures have set the pitch for the economic debate in advance of the next general election. Had the figures been poor, it would have raised serious questions about what might be affordable in the years ahead. But the November figures were strong, and while the trends of recent months emphasise the risks of extreme volatility because of Ireland’s reliance on a few giant taxpayers, this will be a secondary concern in attempts by the Government and the Opposition to woo the voters.
Is prudence already under pressure? This week’s criticism of the October budget by the Fiscal Advisory Council (IFAC) seemed a bit over the top. The talk of “gimmickry” and repeating the mistakes of the past did not go down well in senior Government circles. Minister for Finance Michael McGrath came out with the standard response – that the IFAC’s views were an important part of the process, but he felt that the right balance had been struck. But behind the scenes the reaction was, to put it mildly, more robust.
The council made some valid points in terms of once-off spending continuing to be separated out, while much of it should really be counted as permanent. And about the continuing inability of the Government – of any Irish government – to get a handle on health spending and budget for it properly. These are important issues which need to be tackled. The counter view held in Government is that the budget is still strongly in surplus with money being put aside into funds to support future spending and that IFAC should have given more credit for this. Also, the Irish budget was one of the few to have been given the green light by the European Commission in its recent assessment.
Much of this, of course, is because one side is from Mars and the other from Venus. The council is doing its job, being a thorn in the side of the Government. The Coalition, meanwhile, is living in the world of politics and the expectations of the electorate. In the middle stand the two budget Ministers, McGrath and Paschal Donohoe, the central midfielders of the Coalition who have ensured that the budget remains in surplus, while giving some ground to the political demands for more spending and in particular for the extension of cost-of-living supports.
[ Our multinational economy cruises in the fast lane but the domestic one is definitely slowing down ]
This was one of the key issues to annoy the council and they are right that such supports in future have to be more targeted. But whether this can be achieved at a time when the public is getting increasingly used to such payments is a big political question heading into 2024. It was interesting, that in responding to the council’s comments, Sinn Féin’s finance spokesman Pearse Doherty focused on its highlighting of the shortcomings of the budgeting for health, saying it was further evidence of the underfunding of the service. He did not mention the council’s criticism of the household supports one way or the other, leaving the party’s options open here.
Donohoe and McGrath will continue to try to hold the line, we must presume. If they are still around. The possible departure of Donohoe, were he to succeed in getting the big job at the International Monetary Fund and perhaps McGrath, too, to the European Commission could quickly tilt the balance in the Coalition, with less attention paid to prudence. After all, Donohoe got little political benefit from the “prudent Paschal” tag after the last general election, even if his policies subsequently left the Coalition much better placed to deal with the pressures of the pandemic and the cost-of-living crisis than it might have been.
Can the Government really play the prudence card if it goes for another blockbuster budget next October, no doubt driving the fiscal council to new levels of apoplexy?
The temptation for the Coalition, with Sinn Féin playing the populist economic card, will be to continue to give ground and chase it at least some of the way down the road on cash supports for voters. But the dilemma here is that a key part of the Coalition’s case during the election campaign will be that Sinn Féin’s policies would wreck the economy and imperil the public finances. Can the Government really play the prudence card if it goes for another blockbuster budget next October, no doubt driving the fiscal council to new levels of apoplexy?
There is a real dilemma here. Even after the pandemic, the last two budgets – for 2022 and 2023 – have cost an additional €11 billion and €14 billion respectively, boosted by “once-off” payments, some repeated the second year. As inflation declines and – we hope – household energy bills drop too, is a pre-election budget going to involve a much lower figure, similar to pre-pandemic packages? Can the Coalition really offer a hamburger budget after a couple of Big Macs and hope to get re-elected?
This, of course, is partly a matter of the expectation of voters – and politicians’ perception of this. The political risk is that the sugar rush wears off quickly. The economic one is that spending money on giveaways – while necessary and largely justified during a crisis – will, if it continues, eats away at the cash needed for other things that the country really needs.
IFAC have, in recent years, provided a valuable service by focusing on these longer-term issues – and its latest report underlines Ireland’s lagging position in key areas such as transport infrastructure, health infrastructure and the size of the housing stock.
Prudence, in an Irish context, could be said to mean two things. The first is keeping the public finances in what might be called a positive cycle, with the debt burden easing and enough leeway to cope if corporation taxes do take a tumble. Just look at the UK, where the recent autumn statement implies big cuts to spending on government services and, before long, lower investment and higher taxes too. Ireland simply cannot go there again.
But prudence also means longer-term thinking – seemingly rare enough in politics and the public service. Plans to set aside funds to ensure that State investment spending can continue even if the public finances hit a sticky patch are a welcome step in this direction. But more is needed to bring the State’s disparate spending plans in areas such as transport and housing into something coherent, to ensure additional health spending delivers, rather than being a last-minute scramble to fill holes and to plan to use the money now at our disposal to the best effect, with all the challenges of implementation this entails.
It is about having something to show for it when the current period of plenty in the public finances starts to run out. As, some day, it will.
After several Big Mac budgets, can the Coalition really offer voters a hamburger?
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09.12.2023
This week’s corporation tax figures have set the pitch for the economic debate in advance of the next general election. Had the figures been poor, it would have raised serious questions about what might be affordable in the years ahead. But the November figures were strong, and while the trends of recent months emphasise the risks of extreme volatility because of Ireland’s reliance on a few giant taxpayers, this will be a secondary concern in attempts by the Government and the Opposition to woo the voters.
Is prudence already under pressure? This week’s criticism of the October budget by the Fiscal Advisory Council (IFAC) seemed a bit over the top. The talk of “gimmickry” and repeating the mistakes of the past did not go down well in senior Government circles. Minister for Finance Michael McGrath came out with the standard response – that the IFAC’s views were an important part of the process, but he felt that the right balance had been struck. But behind the scenes the reaction was, to put it mildly, more robust.
The council made some valid points in terms of once-off spending continuing to be separated out, while much of it should really be counted as permanent. And about the continuing inability of the Government – of any Irish government – to get a handle on health spending and budget for it properly. These are important issues which need to be tackled. The counter view held in Government is that the budget is still strongly in surplus with money being put aside into funds to support future spending and that IFAC should have given more credit for this. Also, the Irish budget was one of the few to have been given the green light by........
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