Next year should see Ireland have a balanced government budget for the first time in a decade. The huge deficit between government income and spending that opened in 2008 has been successively and successfully reduced but some risks remain, not least of which is the €200 billion debt that running such deficits contributed to.
The latest estimate from the Department of Finance for the scope available for tax and spending changes in 2018 is €1.7 billion. Spending can rise by more than this if offsetting revenue raising measures are introduced.
Once the deficit is closed this figure will roughly double but the fiscal effort required to close the deficit next year limits the figure to €1.7 billion. Some changes are possible before budget day, but it would be prudent for the Government to stick to these plans.
Once we account for demographic pressures, the carryover effects of measures announced in last year’s budget, and the spending required for existing commitments such as public pay deals and the revised capital plan there is about €500 million available for new measures on budget day.
No budget speech can satisfy all requests for public resources. We must recognise that choices have to be made between competing resources.
One choice we can make is to use the current favourable economic environment to help prepare for some of the risks that the public finances and the economy faces.
Policy changes
Corporation tax is the most volatile of our main taxes, and has risen recently to near unprecedented levels without much in the way of domestic policy changes. Corporation tax brought in €4.6 billion in 2014, while this year around €7.7 billion is expected to be collected.
Figures from the Revenue Commissioners show that around 80 per cent of corporation tax is paid by foreign companies, while there were 1.7 million households enumerated by the CSO in the 2016 Census. The recent surge in corporation tax from foreign companies corresponds to €1,500 for every household in the country and most of it has been spent.
The Irish economy is growing rapidly, and needs no additional fiscal stimulus given our position in the business cycle. The unemployment rate has fallen to near 6 per cent, and we are beginning to see upward, though moderate, pressure on average wages in the economy.
Housing remains an area of obvious concern. Housing output needs to increase substantially, but thought needs to be given in how to do this in a sustainable manner. At a basic level this could be overcoming the problems of just having workers with the appropriate professional and trade skills to undertake the work.
Rebound
The rebound of the economy has been remarkable, but we are not far off facing capacity constraints. When these arose in the mid-2000s we imported the labour to sustain, albeit temporarily, the excess growth rates of the time. It is easy to look back and say that fiscal policy then should have “leaned against the wind”; it is much more difficult to do it in real time.
There will be many claims that the upcoming budget will not go far enough to address the problems we face. But rushed solutions to those problems should not be introduced and risk repeating the mistakes of the past, or finding new ones.
There have been repeated calls for public capital spending to be increased. The Government have responded to this by setting out a capital plan which envisages exchequer capital spending almost doubling from its 2016 level by 2021. And this is within plans which show compliance, even over-compliance, with the fiscal rules.
This response may be appropriate but we should not mistake activity for achievement. We previously ramped up capital spending during the last boom but value for money was not always delivered.
In the past few weeks we have seen our rail operator propose the closure of a number of lines, some of which were only introduced on foot of significant public investment in the past decade. Our motorway network was extended during the same period to connect most of the regional cities with Dublin, but some parts of the network see traffic levels of around 15 per cent of their capacity.
Limited resources
As we will always have limited resources we should ensure that they are being used in the best manner possible. All projects to be funded from the increased allocations to capital spending need to provide value for money.
The upcoming budget is the first to be presented by the reformulated Government. Through a combination of luck and sound policies it will be presented against the backdrop of a positive economy and an improving fiscal situation.
If there is anything to be wary of it is that they might try to give us everything we want.
Seamus Coffey is a lecturer in economics at UCC and chairman of the Irish Fiscal Advisory Council which has published its pre-budget statement