The money keeps rolling in to the State coffers. Having forecast a sizeable surplus of over ¤6 billion for this year at budget time last September, the Government has now upped this to some €10 billion. Nobody would be too surprised if it ended up even higher – and official forecasts envisage a further rise in the surplus in 2024.
Buoyant tax revenues are, of course, behind the strong exchequer position. Corporation tax continues to outperform and the cumulative rise since 2015 is extraordinary. But other tax headings, particularly income tax, are also growing strongly.
The Department of Finance continues to warn that the State finances are being supported by corporate tax receipts which are vulnerable in the years ahead. It argues that factoring out what it judges to be windfall receipts – those not explained by economic activity here – would leave the exchequer in deficit.
This is a reasonable conclusion – but it is also possible that corporation tax could remain strong, even if overall growth rates ease. The key point is that nobody knows how the pluses and minuses ahead will balance out.
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There is no shortage of potential good uses for the money, though there are three issues here. One is the uncertainty of the revenue stream – it would be dangerous to base further increases in current spending on what may be temporary revenues.
The second is the capacity constraints in the economy. Even if, for the sake of argument, the Government decided to increase the already-significant spending on housing, it is far from certain that it could find builders to do the work at any kind of reasonable cost. The third, and linked, issue is the risk of pushing inflation yet higher by pumping more cash into the economy right now.
None of this means that the Government should sit on its hands. The extraordinary rise in revenues provides opportunities which need to be taken. One way of doing this is to set some revenues aside to meet future costs and ensure that investment spending in key areas like housing and health can continue, even if growth slows. A rainy day fund has already been established – the cap of ¤8 billion on the money it can hold needs to be lifted – and another fund to support future investment is being considered. Properly structuring this will be vital.
The Government also needs to consider carefully how it will cope with the huge capacity constraints now affecting the economy. In themselves these constraints may now slow economic growth. But developing an economic plan to increase the economy’s capacity and doing so in a way that tackles the urgent need to reduce emissions is now the central economic task facing the Coalition.