Nothing better illustrates the phenomenal success story of the Irish economy over the past decade or so than the debates taking place in Dublin and London in advance of crucial budgets due to be unveiled in both country’s parliaments in the coming weeks.
In Ireland, the debate is all about how to spend the surplus tax revenue pouring into the exchequer, with some experts warning that too much of a splurge could lead to another bust down the line, while others urge massive spending on infrastructure to ensure continued growth in decades to come.
In the UK, the only question is the scale of the cuts that will be implemented by Chancellor of the Exchequer Rachel Reeves to try to rescue the country’s ailing economy and put it on a path for growth.
Taoiseach Simon Harris has publicly promised that there will be another cost of living package to help people through the coming winter, even though the inflation has eased significantly in 2024, and Minister for Social Protection Heather Humphreys has made it clear there will be big increases in pension and welfare payments.
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There is a very strong argument for serious capital investment in the State’s infrastructure, not only in the obvious area of housing, but also in vital improvements which are needed in the electricity grid and water supply system to deal with the rapidly rising population.
On top of that there is also pressure for big tax cuts for middle and high income earners who are paying the top rate of income tax on a significant portion of their earnings. New Minister for Finance Jack Chambers has been clear that “relieving some of the tax burden,” is a priority for him.
The Irish Fiscal Advisory Council (IFAC), the watchdog set up in the wake of the 2008-2010 financial crisis, has this week warned the Government not to proceed with an “everything now” approach by simultaneously cutting taxes, increasing day-to-day spending and ramping up capital investment.
However, Government figures are quick to point out that the IFAC has issued similar warnings almost every year for the past decade. They have invariably been ignored by successive ministers for finance and, instead of the roof falling in, the budget surpluses and employment have continued to deliver rapid growth. So much so that the money has been there to establish two long-term funds to cater for future needs such as climate change, pension pressures and a potential rainy day.
With an election due in the next six months, and more likely to take place sooner rather than later, the IFAC’s warnings will inevitably be ignored. The Coalition has a unique chance of winning re-election and the idea that it should not give a chunk of the surplus largesse back to the electorate is simply a non-runner.
On Monday, Chambers paid a visit to Downing Street to meet Reeves and discuss their respective challenges. Both are new to the job but the contrast between their positions could not be more stark. While Chambers has an €8 billion surplus to play around with, Reeves has to find spending cuts and tax hikes to plug a €26 billion black hole in the UK’s finances.
The challenge facing Reeves and her Prime Minister Keir Starmer is eerily reminiscent of that which faced Garret FitzGerald and his Fine Gael-Labour coalition in Ireland in the 1980s. FitzGerald had to cope with a disaster in the public finances created by the profligacy of Charles Haughey. Starmer has to deal with a similar black hole accumulated by his Conservative predecessors.
FitzGerald did manage during his two periods in office to bring order to the public finances but it required massive tax hikes and spending cuts which depressed growth and created record levels of unemployment. In Opposition, Haughey denounced the measures as “Thatcherite” and cruel. The real irony is that when Haughey came to power as leader of a minority Government in 1987, his Minister for Finance Ray MacSharry adopted the Fine Gael budget of that year but gave it an added twist of even more spending cuts. The medicine worked and it set the country on the road to its current prosperity.
Starmer and Reeves are already facing Haughey-style criticism from their Conservative opponents, who are attacking necessary cuts in spending programmes, such as the winter fuel allowance, as if they have no responsibility for the UK’s current crisis. If the UK Labour Government wants to avoid the fate of the Fine Gael-Labour coalition of the 1980s it will stick with the plan to get the public finances in shape as quickly as possible and implement the required spending cuts in its early years, so that it will be able to show concrete results by the time of the next election.
In Ireland, the very different problem facing the Government is how to spend the surplus wisely on things that people need, without building up problems for the future. If the Coalition does win re-election it will need to be alert to warning signs that the boom is ending but for the moment it is a question not of whether to spend but where to spend it.