The Government faces a series of very difficult balancing acts in the budget. It has to protect households without fuelling inflation, judge between temporary and permanent measures and spend enough, without endangering the outlook for the public finances. Add in the deep uncertainties of the current economic and political backdrop and the scale of the task is evident.
However, as the latest report from the Irish Fiscal Advisory Council (IFAC) points out, it also has some points in its favour. Tax revenues this year will come in way ahead of target, there is substantial money set aside in contingency funds and so there is some significant room for manoeuvre. The challenge is to make the right calls to address the short-term issues, while also keeping the public finances on a sustainable longer-term course.
Here IFAC repeats previous advice that the cost of an ageing population, pensions, climate change and the Sláintecare programme have still to be fully accounted for in the longer term. A Commission on Tax and Welfare report, currently with Minister for Finance Paschal Donohoe will outline options for paying for all of this. The IFAC document underlines the trade-offs involved. One relates to public sector pay – the more that is spent here, the less is left for elsewhere. That said, public sector employees face higher inflation and falling real wages.
The proposal to be voted on by public sector unions looks to be at the limits of what is affordable, against a very difficult backdrop. The measures to give higher percentage increases to lower paid staff is welcome. The need to manage the public service to deliver better value for money remains. In trying to strike the correct balance, a key issue for the Government is the uncertain outlook for growth, and thus for tax revenues. Significant once-off measures aimed in particular at the most vulnerable households are an appropriate response.
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The IFAC advice – to target these measures at those most in need – is sensible, though likely to be politically challenging. The Government will also want to give some help to the middle ground. The other political issue is what to do if the situation deteriorates further over the winter, perhaps triggered by a complete shut-off of Russian gas to the EU. As Ibec said in its pre-budget document, a flexible approach will be needed and – as happened this year – significant contingency reserves need to be set aside.
The budget will also contain a raft of permanent tax, welfare and general spending measures. Welfare rises and some tax adjustments are needed, given the inflationary surge, and the challenge of improving public services and investing in areas such as housing and energy infrastructure remains. A large part of the budget is about the cost of living, but the longer term questions of delivery also remain vital.