A budget has rarely been framed against such a backdrop of uncertainty. And rarely has there been such pressure to act; to respond to the cost-of-living crisis and deal with longer-term problems in areas like housing and health. The latest figures, showing inflation approaching 10 per cent, have upped the political ante further — and a lot of price pressures have still to feed through to consumers.
A big battle is brewing about what to do, not only between Government and Opposition but within Government itself. It is framed by the contrast we have seen all year in the economy — strong growth now and vastly overshooting tax revenues but huge uncertainty about how things will be next winter and fears of a slowdown or a more fundamental economic reordering the economy is at a turning point, we just don’t know how sharp the turn will be. And in terms of budget policy, turning points are dangerous territory.
On the face of it, there are significant resources to spend. Tax revenues in the first five months of the year are way in advance of target — by an amount running well into the single figure billions. The issue is what will the position be next year, if growth takes a big hit or there is some kind of international recession. The reliance on corporation taxes at a time when the big US tech players are under market pressure and some may see falling profits, is a particular issue.
Honestly, who knows? You’d be as well talking to a military analyst or a supply chain logistics expert as an economist
The tactic of the budget ministers — Paschal Donohoe and Michael McGrath — is to try to focus much of what might be called the emergency spending on one-off measures, rather than permanent commitments. So, for example, the €200 energy payment to households could be repeated and there could be more once-off payments to those on the fuel allowance scheme, or even more generally in the welfare system.
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This same approach was used during Covid-19, with some success, via measures such as the Pandemic Unemployment Payment and the Wage Subsidy Scheme. These cost a bag of money, but did the job and could be wound down afterwards, even if in areas like health much of the increase seems to be sticking. This approach allows some time to see how things play out without making too many long-term commitments.
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The Government will publish economic and budget forecasts in the Summer Economic Statement due on Monday. It is expected to signal the rule announced last year to keep permanent spending increases to 5 per cent is not fit for purpose in a world of much higher inflation. Higher increases will be needed in the light of rising inflation if the real value of spending is not to be cut.
The existing indication that there would be €1 billion in new spending on budget day will be shelved — there will be significantly more.
Just how much more is the question? What is the right balance between being realistic and maintaining State services and actually chasing inflation and making the problem worse?
The Department of Finance will follow the consensus estimates that the economy will continue to grow, just a bit more slowly. But, honestly, who knows? You’d be as well talking to a military analyst or a supply chain logistics expert as an economist. Or to Mystic Meg,
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It is clear that the world has changed post-Covid and with a conflict under way in Europe. Everything feels upside down. But how much of this is transient? Donohoe has raised the possibility of a new era of lower growth and higher inflation, which would have big implications for the public finances. The correct budget response rests hugely on how much of the shock and upheaval we are seeing now will stick — and what this means for Ireland’s economy.
We just don’t know, so here are a few principles that should be adhered to.
First, there are clearly groups who are suffering badly as prices shoot up and need to be helped. Significant welfare rises are clearly on the cards. But beyond that temporary measures can play an important role in helping people through the winter. This may of course create problems when the temporary measures run out, particularly if inflation pressures remain high.
Second, the income tax system needs to be adjusted to some extent at least for inflation — otherwise higher pay will mean a proportionately higher tax take. So earlier indications of a budget tax package of €500 million will be shelved. More will be needed to adjust tax bands and credits and to extend current indirect tax cuts on fuel. But the idea that tax levels can be “ cut” is a fallacy.
Which direction are house prices going?
Third, measures to provide greater public subsidies in areas like childcare are reasonable, but there is still a lack of any acceptance across the political system that the increase in the role of the State will have to be paid for. So will the ageing population and climate change policies. Our politics is stuck in an era of zero interest rates, but the world has moved on.
The fourth key factor will be to put some money aside from the flush resources now available in some kind of rainy day fund. Because unexpected rainy days are getting more common. The contingency resources put aside this year for Covid and Brexit have proved useful, albeit not in the way expected.
The Government cannot — or should not — sit on its hands. There are plenty of things it needs to get on and do, even if you can’t help wondering what amount of money is needed in areas like health and housing to deliver decent improvements in services. The efficiency with which money is spent will never be dealt with on budget day.
But for now the focus in the short-term. Whatever happens, it will be the biggest budget package in many years. But it is all about getting the balance right. Betting the house on the current surge in tax revenue continuing would be a really serious mistake. Not doing so will require avoiding the traditional budget game of looking at how much money is available to spend and then arguing about who gets what. In the current political environment, where prudence doesn’t seem to win many votes, that won’t be easy.