Liz Truss’s government in the UK has gone for broke in its first big financial move to fight the cost-of-living crisis, slashing taxes and announcing tens of billions in additional spending, including taking a bet on wholesale energy prices. It is a big, risky gamble.
Ireland needs to play a smarter game in next week’s budget. Massive resources will be committed in a mix of once-off and permanent measures which look set to amount to around €10 billion. But Ireland has to leave itself room for manoeuvre in case a lot of the temporary measures need to be repeated next year, perhaps in the context of an international recession which is bound to affect growth and tax revenues.
Former Financial Times editor Lionel Barber tweeted that the new UK chancellor’s mini-budget showed ‘the government is going for broke, literally’
The UK government is pushing up spending and slashing taxes, a formula which will work only in the event on an unlikely jump in economic growth. Former Financial Times editor Lionel Barber tweeted that the new UK chancellor’s mini-budget showed “the government is going for broke, literally”. The interest rate on long-term UK government debt shot up to 3.8 per cent on Friday as investors took fright at the plans for much more borrowing – the equivalent Irish rate is around 2.5 per cent. Sterling is falling fast. The UK will need luck to avoid a full-on financial crisis.
The Irish Government does not need to run the same risks. And here it is a question of balance. The Coalition is right to commit significant resources to helping households and businesses. With a surplus heading for over €4.4 billion this year before budget-day measures, this is a no-brainer. Freezing homes and bust businesses are not an option when the Government has that kind of money to play with.
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It is just a question of how much to spend now and how much to keep in reserve for next year and beyond, when who knows what will happen. And of keeping the public finances on a stable, longer-term path. A key lesson from the reaction to the UK mini-budget is that the markets are now on alert again as the Covid-era of states being able to borrow at zero interest rates is over.
The Government looks set to commit heavily to once-off measures – special welfare and energy-linked payments and business supports this year and into early next year. But it also needs to consider what it will do if energy prices are still at or near current levels in 2023. If the Government does not intervene again, households will be worse off next year than this year and businesses, saved in 2022, could go bust in 2023. That would not make a lot of sense.
So the Government needs to be sure that as well as bailing out the economy this year, it has some spare bullets to fire next year. And with the likelihood of a sharp slowdown in growth, tax revenues could by then look a lot less buoyant.
Looking at the longer term, which these days is anything beyond a few months, the Government cannot risk ending up in a financial squeeze over the next couple of years, having to cut back on spending and investment plans as happened after the financial crash, with such dire longer-term consequences in areas such as housing and health. It has to budget for the next few years in the expectation that corporation tax will at very best hold this year’s level of around €20 billion, or quite possibly fall back.
Rainy day fund
So what does this mean for the budget package? It means spending a fair bit of this year’s massive budget surplus to support households and businesses in the short-term, but not all of it. The Government is due to put €500 million aside in the rainy day or reserve fund each year, but should put more in the pot this time, perhaps under a range of headings, to ensure it has leeway in 2023. It is, of course, raining heavily in economic terms now, but it could still be lashing next year.
Investors are again focusing on individual countries as they assess what interest rate they are prepared to lend at – as we can see now with the wobbles in the UK markets
It also means sticking to the broad parameters for the longer-term, permanent budget measures as set out in the Summer Economic Statement, which signalled a €6.7 billion package. You would suspect it might go a bit higher, but we can’t go back to the days of using soaring corporate taxes to pay each year for spending overruns in health. In recent years finance minister Paschal Donohoe has managed to push the budget back into surplus while still fighting the Covid-19 pandemic. It is vital that the story Ireland has sold in recent years of solid public finances is maintained. Investors are again focusing on individual countries as they assess what interest rate they are prepared to lend at – as we can see now with the wobbles in the UK markets.
It is a sign of the extent of the crisis, and the place Irish politics is in, that €10 billion committed next week will still be greeted as “not enough”. Even beyond the immediate measures, the Government needs to do some serious work over the rest of this year looking at how it would deal with a likely longer-term lift in energy prices that could last some years. Capping bills, as the UK has done and Sinn Féin advocates here for this winter, leaves a big risk on the State balance sheet if wholesale prices rise sharply higher. But households and businesses cannot be expected to take all this risk on either. Cash supports will get them through this winter, but what then?
Fortunately, the budget takes place after a very sold year for the economy in which the total amount of earnings by employees rose 12 per cent, reflecting strong jobs growth and rising wages. Employment is at record levels. The exchequer forecasts in the pre-budget White Paper are encouraging. It gives something to defend in the latter part of the year and into 2023 in what will be tougher conditions including a likely euro zone recession. Next Tuesday, the Government needs, above all, to show that it is planning for the long term and not taking a UK style “hit and hope” approach to fighting the crisis.