How should the State’s €16 billion surplus be spent? Here are 16 ideas

The public finances will be in surplus to the tune of €10 billion this year - and on current forecasts Minister for Finance Michael McGrath could stand up on budget day with a surplus for 2024 of €16 billion.

Even when he meets expected bills, he will have billions to “ spare”. Irish governments are much more used to dealing with budget deficits - so what do you do with such a big surplus? Here are some of the options, and the key arguments.

1. Pay down some of the national debt

Not a big vote winner, though would win plaudits from the fiscal conservatives.

The national debt rose by some €20 billion during the pandemic to €224 billion. The Department of Finance sees the cash value of the debt falling to €215 billion by 2026 and as the economy will grow in the meantime, the debt burden will fall more rapidly (from 83 per cent of GNI* - the measure developed to factor out multinational distortions - last year, to 65 per cent by 2026). But, politically, a straight policy of repaying debt more rapidly is not a runner, particularly given the key infrastructural deficits in the economy.

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2. Build up cash reserves

The Government has already put €6 billion into a rainy-day fund - called the National Reserve Fund - to support the exchequer if trouble hits.

The most obvious causes would be a sudden drop in corporation tax receipts, or a recession hitting revenues more generally. The fund could support the exchequer through these kind of problems. A cap on €8 billion has been put on the fund, but this may be increased.

3. Put more money aside elsewhere

Minister McGrath is now set to propose another kind of fund - a kind of sovereign wealth fund - which would be invested to help meet future needs from an ageing population and climate change. And to maintain investment spending generally in the years ahead as there are big costs coming down the road. The National Reserve Fund could be merged into this to form one larger, with more of a focus on the longer-term costs than shorter-term smoothing of the cycle.

The additional cost of the ageing population - through areas like the State pension and healthcare - is estimated to be €7 billion to €8 billion to the exchequer by 2030, according to Department of Finance officials.

[ Government runs record €8bn budget surplus in 2022 as tax revenues surge ]

An investment fund seems sensible, particularly given the unpredictability of corporate tax revenue. This could help to end the old boom-to bust-cycle where governments are forced to cut spending, hike taxes and slash investment when recession hits, making a bad situation worse. It remains to be seen what rules might be put on using the money in an expanded fund in the years ahead - proposals are expected shortly.

Higher reserves also mean that the net public debt position is lower - national debt is generally measured as a gross cash figure, but having assets and cash in the bank on the other side of the balance sheet improves the net position.

4. Build more houses

An obvious use of more State funds. given the housing shortage. But we have seen how the Government is already struggling to spend the money it has already allocated.

Some €4 billion of State funds is due to be spent on housing this year. Given the political pressure, some more State spending on housing is likely, but the real challenge is finding ways to get them built more quickly.

At a time when the economy is already at full capacity, there is a shortage of construction workers and planning and delivering projects takes years. A bigger surplus gives options for the housing programme, but some thinking is needed to get real results.

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No point in wasting money to push up inflation or line the pockets of developers - but the strong outlook for surpluses and the possibility of setting cash aside should create the opportunity for planning a genuine long-term programme, which is the only thing which will fix the problem anyway. Long-term, however, is not a politically attractive concept.

5. Invest elsewhere

Similar considerations here to the debate on housing. Again, the prospect of ongoing surpluses should allow Government to look again at its National Development Plan and in particular vital investment in areas like health infrastructure and in climate change investment. Again, delivery is the key challenge for these big investment plans. As things stand, investment here is already due to rise to levels which are high by historical and international standards ( over 5 per cent of economic output) and capacity constraints are already a big barrier.

6. Increase day-to-day spending more rapidly

Current spending has been increasing at a steady pace in recent years and this is set to continue - driven in part by inflation. Boosting it further on the basis of what may be temporary tax receipts would not be a good idea.

There will be a budget debate about welfare increases - and demands for higher public pay increases.

With economic growth strong and inflationary pressures, there is no case for splashing money across the economy on day-to-day spending rises. This happened in the run up to the financial crash - and that did not end well. Political pressure to spend will be intense, however.

7. Have more “once-off” measures to combat the cost of living squeeze

This year’s budget involved over €4 billion in once off payments and supports - including special welfare payments and the €200 electricity credits - to help people through the cost of living crisis. We can expect more of this in October. It allows money to be spent, without committing to the risk of continuing spending on the basis of possibly volatile revenues.

8. Increase public sector pay

Public pay is a key part of day-to-day or current spending. And the State, as employer, faces the same problems as other employers in attracting staff. Public pay will rise in the next agreement from 2024 on, with inflation remaining a factor, but again it would not be clever to repeat the mistakes on the early 2000s and base higher increases on temporary revenues.

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9. Implement Sláintecare

The plan to transform the health services will cost many billions - however, as the Fiscal Advisory Council, the budget watchdog, points out - full costings have never been put on it. An ageing population will also push up healthcare costs. Again, capacity is an issue - the ESRI has warned that there are not enough GPs to meet the plan to provide free access to all to primary care by 2026. Again, capacity is a big issue.

10. Cut income taxes sharply

The Government would have the money to do this. Will we see Leo Varadkar’s 30 per cent tax rate back on the table?

Big income tax or USC cuts would be a mistake for three reasons. First, they would add to inflation. Second, they would be based on unforecastable tax revenues from the corporate tax sector, some of which could disappear quickly.

And third, there are some really big bills coming down the line in adjusting for climate change and paying for an ageing population, changes which bodes such as the Fiscal Advisory Council and the Commission on Tax have warned will require higher taxes in the years ahead. Not much point in narrowing the tax base now, only to face a squeeze in a few years time.

11. Abolish the USC

Remember Fine Gael once championed this, and then amended it to phasing it out. It raises close to €5 billion a year. Doing so would be a dangerous demolition of the tax base.

12. Adjust income tax bands for inflation

If the income tax bands are not adjusted as wages rises, then the Revenue Commissioners gets a higher take from people’s money as wage increases push them into the higher tax and USC bands.

This adjustment has been presented in recent years as a tax “cut” but really it is just standing still. Politically, this now looks certain to happen in the 2024 Budget. The question is whether the Coalition will go further.

13. Cut other taxes like the local property tax, or inheritance duties

This would be a bad idea. The Irish tax system relies too heavily on people’s incomes and too little on taxes in areas like capital and property, when compared to other countries.

This has an economic price as taxes on labour have a bigger economic cost than taxes in areas like property. With a relatively narrow tax base, using the potentially temporary boost from corporation tax to cut taxes in other areas apart from income would be crazy.

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In fact, the Commission on Tax argued that taxes in capital and property need to increase in the years ahead to widen the tax base and pay for some of the longer term bills coming down the line.

14. Kick off a tax reform plan

The Commission on Tax outlined a plan to reform the tax system - raising more money from wealth and capital taxes, introducing some new environmental taxes, maintaining a wide income tax and increasing PRSI.

The presence of large surpluses could make a wide-ranging tax reform plan easier to implement, while also meeting the commission’s goals. However the politics of any tax increases or new charges with such a high surplus will not be easy.

15. Order a fancy new Government jet

A process is under way to order a new jet - probably next year - with leased aircraft being used in the interim. The likely cost of €50 million to €70 million is a drop in the ocean of the expected surpluses. Maybe we could get a fleet? But ministers will know that this will still be controversial.

16. Want to really spend money?

A nuclear power plant would probably set the State back by €20 billion to €25 billion. That won’t happen, as we know, but funding the energy transition is going to consume a lot of cash.

As with Sláintecare, the Fiscal Advisory Council has called for fuller costings here from the Government. The planned transition to electric cars could, on its own, cost the exchequer €1.5 billion a year in lost motor tax revenue. And then there is a need for huge State investment in new energy sources as well and in the associated infrastructure.