Paschal Donohoe to take lead role as budget provides acid test

Behind tightly closed doors, in meeting rooms and offices across the Government Buildings complex, the shaky coalition Enda Kenny put together last May will finally decide, over the next 3½ weeks, whether it can govern or not.

Ministers and their officials will horse-trade and haggle, cut deals and compromise, eventually hammering out next year's budget which Michael Noonan and Paschal Donohoe will present on October 11th.

And so, the Government will pass the first complex administrative challenge of its life. Or it will not prove equal to the task, and there will be an election. For a government than cannot budget, cannot govern.

Most expect it to manage.

Governments often go to the wire on budgets, but they almost always get there in the end. Some Government insiders worry that the newcomers to Government, the Independents, and the novel Dáil arrangements which support the minority Government, are unaccustomed to and unprepared for the process.

Hospitalised

But it is in all of their interests to agree a budget. Nobody less wants an election than the members of the government.

Nowhere does a government give force to its political will as much as in the framing of its budgets. It is the very stuff of governing – how much and where to tax and spend, where the state should play a role in the economic life of its citizens and society, what its obligations are to provide for those citizens. These are among the central questions of our politics.

“Noonan is the rock,” says one Minister. “If he goes, it all falls apart.” That overstates things, but it is how many veterans of Kenny’s administration feel. Now, with the Minister for Finance not in the best of health – he was hospitalised this week and his officials have been trying to manage his workload for some time – much of the heavy lifting on the budget will be done by Donohoe, the young Minister for Public Expenditure and Reform. Consequently, the budget “is all about Paschal”, says another Minister.

The tax elements – Noonan’s preserve – are largely flagged. There is a little more than €300 million available for tax cuts, which one high-ranking source says will be stretched to €400 million on budget day, courtesy of a little of the fiscal ingenuity finance ministers always like to show off.

USC cuts, equalisation for tax treatment for self-employed, inheritance tax cuts and a few incentives here and there will eat up €400 million pretty quickly.

The rest of the budget package will comprise increases to the allocations of Government departments. They have presented their initial requests for funding increases to Donohoe’s department. They are predictably over the top, following the usual negotiating tactic of demanding the sun, moon and stars before settling for a smaller selection of celestial bodies. It means that Donohoe is fielding demands for more than three times the amount of money he has to spend. He briefed his Cabinet colleagues on Wednesday on the aggregate of their requests for additional funding so far.

He told them that the tab for their spending demands was running at about €3 billion.

"This year, we will spend about €55.8 billion," he told The Irish Times this week. "And the plan for next year is that we'll go from €55.8 billion to €57.6 billion.

“That’s an increase of €1.8 billion which, in percentage terms, is an increase of about 3 per cent, versus a year ago.”

However, half of this is already allocated – “approximately €900 million to meet the effects of demographics in our schools, to honour the commitments that we have under Lansdowne Road for next year, and then to honour additional commitments that we will have in capital [spending] for next year,” Donohoe explains.

“So, that then means we have approximately €850-€860 million in which new policy choices can be made. The split of that, at the moment, is that we have approximately €600 million available for new policy initiatives for current spending next year and we have €250 million for policy choices in capital spending for next year.

“And, out of those figures, we have already chosen to allocate approximately €200 million to fund commitments in the housing action plan.”

Donohoe says he can meet only “a fraction” of the demands he faces. This is a matter of political choice, certainly; but it is also a matter of arithmetic, and of law.

European rules

Finance ministers are now constrained by European budget rules which form part of domestic law. Official sources say there is some wriggle room on these, but not a whole lot.

Donohoe has nothing like the freedom that, say, Brian Cowen or Charlie McCreevy had when it came to spending plans. Back then, of course, public spending increases of 10 per cent a year and beyond were not unusual. That brought short-term political gain, but sowed the seeds of disaster. When the banking and property crash happened, the public finances collapsed. Years of painful cutbacks to public spending programmes and tax hikes followed.

Donohoe describes defending the austerity measures as his “defining experience” as a TD. The Minister reiterates, again and again, the lesson he takes from the crash and the era of austerity that followed it: “The unfunded or unaffordable spending increase of today is the savage cutback of tomorrow. . . And I’m not going down that path again.”

That will require him to say “no” to most of his colleagues for most of what they want – and to justify his choices to the public. To justify tax cuts, while spending budgets remain tightly controlled. To justify public sector pay increases, while services remain inadequate in many areas. To justify spending in one area, and not another.