The Summer Economic Statement, a key document in the run-up to the budget, shows the pressure on Government from the coincidence of soaring tax revenues and a cost-of-living crisis. The two budget ministers, Michael McGrath and Paschal Donohoe, have managed to keep the plans under some kind of control, though there will be further battles in advance of the budget. One will be the extent of once-off measures, an important part of the 2023 package and likely to feature again for next year.
The Government has decided to breach its own spending rule, which restricts the increase in permanent spending to 5 per cent, for the second year in a row. Given the high level of inflation and the intention to keep the rise to close to 6 per cent, this is reasonable. But with extra spending likely from once-off measures, the challenge of returning to some kind of budget normality remains.
How many times do once-off measures have to be repeated to become an expectation on budget day? And if the argument is to have a package that does not to add to inflation, then once-off payments will do this in the short term as well.
There is another fundamental issue here. If once-off payments are being used to compensate households for higher inflation, what happens when they run out, assuming, as it likely, that prices remain high? Better-off households may be able to cope, but lower income ones are exposed. The Government cannot compensate everyone for higher prices, but it needs to protect those most in need.
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More talking lies ahead. The Cabinet is yet to decide on how to use the excess corporation tax receipts and what the parameters of a fund into which this money would be paid should be.
The details of the budget package also remain to be sorted out. The indications are of limited relief for income tax payers. Much of the money allocated to tax reductions – some €1.15 billion – will be needed to adjust tax bands and credits for inflation. It remains open to the Government to spend more on income tax cuts by raising new revenues elsewhere, but this is not easy either. The figures suggest that the actual tax burden on those paying income tax will not fall by much, if at all. This may be appropriate with the economy near full capacity, but taxpayers are correct, too, to demand better services for the taxes they are paying.
Finalising the budget package will not be easy. If tax revenues remain buoyant, there will be pressure on the budget ministers. McGrath and Donohoe may try to hold the line on permanent measures, while giving some ground on once-off payments. But managing expectations and making the most of the strong but unpredictable tax revenues remain huge political tasks. Ireland has an opportunity to underpin the public finances and attack some key problems. That opportunity should not be let slip away.