Typically, discussions around budget proposals gain traction during the summer season. However, in recent years, such conversations have been starting earlier than usual. During May of the previous year, three junior ministers from the Fine Gael party penned a newspaper piece advocating for deductions in income tax, leading to accusations from Tánaiste Micheál Martin of disruption to the budget planning process. This year, Martin and his colleagues from the Fianna Fáil party made the first move, laying out detailed budgetary proposals at their ardfheis ahead of time, and amidst the chill of April the budget suggestions for October are well underway.
Fianna Fáil seems intent on seizing the initiative this year, presumably in an attempt to grab credit for any successful fiscal measures, or perhaps due to discontent over the spotlight received by Fine Gael following Simon Harris’s succession. Regardless, it’s evident the competition is heating up. This isn’t just confined to Fianna Fáil, as evidenced by Harris presenting a collection of his own pledges in his ardfheis speech, including proposals to extend the Help to Buy scheme by five years, implement income tax and USC cuts and increase the tax relief for renters. The Greens are also expected to stake their claim to the fiscal benefits at their own ardfheis.
For a period after the economic downturn, Government spending was handled too conservatively in certain areas, as highlighted by ex Taoiseach Leo Varadkar during his farewell, a notable example being a lack of adequate investment in sectors such as housing. The ensuing economic growth and population surge were unanticipated on a wide scale. Now, thanks to robust fiscal health, the government has been able to expand core expenditure by over 30% since 2020, the year they assumed office. The government has also been able to apply various special supports during the Covid-19 pandemic and the subsequent cost-of-living crisis, successfully bringing the budget into surplus.
An increasingly extravagant budget is becoming standard, and the anticipation of future sizeable public finance surpluses is likely to stimulate further demand for such budgets. These surpluses will be forecast in the initial pre-budget document, termed the Stability Programme Update, to be soon issued by the Finance Department. Its previous version estimated a €65 billion surplus from 2023 to 2026, and the projection for 2024 to 2027 in this year’s document is not expected to vary greatly. The Coalition’s strategy of allocating more than €6 billion annually into two unique funds will decrease flexibility for budget manipulations, and the Finance Department’s concerns about the sustainability of corporation tax are likely to be reiterated.
However, there are indications that these warnings are not being heeded, with reasonable pre-budget suggestions being intermingled with far less effective ones, creating a blend known as the “budget bonanza”. This is happening despite warnings from the Coalition about the riskiness of putting Sinn Féin in charge of public finances.
Ultimately, we cannot sustain the continuous roll out of extravagant budgets that incorporate substantial “one-time supports” for all households on top of the essential services. These “one-off supports”, implemented in response to inflation, have already been renewed twice. A third renewal would not only damage credibility, but also risk inflating an already robust economy.
Despite these concerns, the precedent has been set. Over the past weekend, Tánaiste Micheál Martin expressed his support for continued pension and welfare increases and potentially maintaining the energy credits for all households this coming October. Introduced to aid households during the energy crisis, these credits actually benefit many households that may not even notice the savings, while others certainly will.
Amidst the decline of inflation and energy prices, it’s unjustified to reissue these credits or any other general cash handouts. We mustn’t forget that the energy credits in the budget of last October were quite substantial, costing €900 million, within a €2 billion package of one-time cost of living adjustments. A fraction of this could have provided aid to those genuinely in need.
Notwithstanding the promises of income tax reductions, amendments to tax credits and standard-rate bands are necessary to avoid income tax consuming larger parts of earnings, given the growth in wage inflation. General welfare increases to accommodate surging prices and support the less fortunate would be acceptable, but let’s not misconstrue this as a massive windfall.
Budgetary constraints ought to be instituted to maintain normal levels due to two principal reasons. The first is the looming risk of a significant decline in corporation tax, which seems unlikely before the general election. However, beyond that, it is uncertain. The second reason, more of an inevitability, relates to the sizeable expenses Ireland will incur due to an ageing population and the shift towards a greener economy.
If a colossal budget were to be introduced after somewhat stabilising the public finances, it would contradict the Coalition’s claim of prudent management, as opposed to their portrayal of what they believe Sinn Féin would do.
Based on a rational estimate, the sum of these variables might result in an additional need for €5 billion annually in public expenditure, late into the next government’s term, alongside replacing €3 billion in lost revenue from fossil fuels. This is equivalent to the spend in two typical, pre-pandemic budgets, necessitating an increase in annual tax collection, not a reduction. Hence, the proposal by budget ministers Michael McGrath and Paschal Donohoe to set aside money in two unique funds to bolster future spending is commendable. Notably, however, Sinn Féin voted against this proposition in the Dáil earlier this week, criticising the proposed rules as overly strict, though siding with the idea of conserving funds. The Labour party and the Social Democrats did vote in favour. But examining the debate, one can perceive the tension to keep spending.
The substantial budget surpluses have rendered Irish political views oblivious to the idea of trade-offs. They fail to observe that reductions in tax or increases in spending in one sector results in less available funds for other areas. The government may shrug off another criticism from the Fiscal Advisory Council after their October budget, continuing the trend from last year when they were accused of “fiscal trickery.” However, steering the public finance to a relatively stable position, another massive budget could potentially jeopardize the Coalition’s reputation as a reliable entity, especially compared to their allegations against what Sinn Féin would achieve. This would potentially reduce the general election to a competition of who could dispense the most money. We are all too familiar with the detrimental outcome of such a scenario from past experiences.