Normally budget kites start to flutter in the summer breeze. But over the past couple of years the kites have been flying earlier and earlier. In May last year, three Fine Gael junior ministers wrote a newspaper article calling for income tax cuts and were accused by Tánaiste Micheál Martin of “undermining the budgetary process.” This year Martin and his Fianna Fáil colleagues got their undermining in first, presenting their budget wishlist in some detail at their ardfheis last weekend. In the cool April breeze, the kites for the October budget are already well aloft.
Perhaps Fianna Fáil wants to get in advance of the game this year and try to claim credit for the giveaways. Or perhaps the party is a bit miffed at all the attention Fine Gael has been getting as Simon Harris takes over. Either way, it is game on now. And not only in Fianna Fáil, with Harris already having made a string of his own promises in his ardfheis address, including a five-year extension of the Help to Buy scheme, a programme of income tax and USC reductions and a rise in the renters’ tax credit. Watch out as the Greens claim their share of the giveaways at their ardfheis this weekend.
For some years after the crash, as former taoiseach Leo Varadkar pointed out as he departed, State spending was managed too cautiously in some areas, notably through not investing enough in areas such as housing. Few foresaw the scale of economic growth to come, or the big rise in the population. Now the pendulum is swinging – flush finances have allowed the Government to increase core spending by more than 30 per cent since 2020, the year it came to office. And to introduce a whole range of special supports during Covid-19 and the cost-of-living crisis, while also moving the budget into surplus.
Mega-budgets have become the new normal. And demands for another one will be encouraged by the prospect of ongoing big surpluses in the public finances, set to be predicted in the first of the pre-budget documents, the so-called Stability Programme Update, to be published shortly by the Department of Finance. Last year’s version anticipated multi-billion surpluses each year between 2023 and 2026, and there is no reason to expect a markedly different outlook in the figures for 2024 to 2027 in this year’s document. The Coalition’s plan to set more than €6 billion aside each year into two special funds will reduce the room for budget manoeuvre – and the Department of Finance will no doubt renew its warnings on the sustainability of corporation tax.
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The ‘once-offs’ to cope with the inflationary surge have already been repeated twice. Doing so a third time would strain credibility beyond breaking point
But will anyone listen? There are clear signs that reason is already being lost. Some reasonable pre-budget suggestions are mixing with some very poor ones into a cocktail called the “budget bonanza”. And this is from a Coalition that will tell you Sinn Féin can’t be trusted with the public finances.
The bottom line is that we simply cannot afford an annual repetition of the mega-budgets which add significant “once-off supports” to all households to a core package. The “once-offs” to cope with the inflationary surge have already been repeated twice. Doing so a third time would strain credibility beyond breaking point, as well as risk an inflationary boost to an economy already doing fine.
But the hare is already running. Last weekend, Tánaiste Micheál Martin said that as well as pension and welfare hikes, he would favour repeating the energy credits to all households again this October at something like the level of the last budget. These credits were introduced to try to get households through the energy crisis; they give money to many households who will frankly not even notice the saving on their bill, as well as some who will.
[ State had a budget surplus of €8.3bn last year, CSO data showsOpens in new window ]
With inflation and energy prices falling, there is no good reason to repeat these credits, or other universal cash giveaways. And remember that the energy credits in last October’s budget cost a hefty €900 million, part of a €2 billion package of once-off cost-of-living measures. For a fraction of this cost, those who really need it could be supported.
Income tax cuts are also being promised, but in reality increases in tax credits and the standard-rate band are needed if wage inflation is not to lead to tax taking a bigger chunk of incomes. So fine if they happen, as well as general welfare rises to account for rising prices and support the less well-off. But please don’t present this as some kind of vast giveaway.
Budgets need to be reined in to more normal levels for two main reasons. One is the risk of some big fall-off in corporation tax; this looks unlikely on this side of the general election. But beyond that, who knows? The second is not really a risk, but a certainty, which is that Ireland is facing big bills from an ageing population and the climate transition.
Having got the public finances into reasonably safe waters, another mega-budget would undermine the Coalition’s case that is a safe pair of hands, in contrast to its claims about what Sinn Féin would do
On a reasonable calculation, these factors combined could lead to €5 billion more in annual spending needed by late in the term of the next government, as well as replacing €3 billion in lost fossil fuel revenues. That is around the amount spent in two normal pre-Covid budgets. This will require more tax to be collected each year, not less. It means that the idea of budget ministers Michael McGrath and Paschal Donohoe to put money away in two special funds to support future spending is a good one – interestingly, Sinn Féin this week voted in the Dáil against the legislation establishing these funds, saying it was in favour of putting money aside, but that the rules proposed were too rigid. Labour and the Social Democrats voted in favour. But read the debate and you can sense the pressure to carry on spending.
The big budget surpluses have blinded Irish politics to any concept of the trade-off – the fact that cutting tax or hiking spending in one area means having less cash for other purposes. And perhaps the Government won’t care if it gets another belt from the Fiscal Advisory Council after the October budget, following last year’s accusation of “fiscal gimmickry”. But having got the public finances into reasonably safe waters, another mega-budget would undermine the Coalition’s case that is a safe pair of hands, in contrast to its claims about what Sinn Féin would do. It would turn the general election into a contest of who will give away the most cash. And we know all too well where that has left us in the past.