The risk that the big budget surpluses forecast over the next few years will be frittered away is real. Politicians are always tempted to spread money widely and spend it quickly, to get an immediate electoral hit from as many people as possible. This is the opposite of what is needed in this case.
The surpluses give us what could be a once-off chance to achieve some key goals in areas such as housing and green energy provision and to underpin the public finances so that this investment can continue in the years to come. Instead, under the cover of politics by phraseology — helping the squeezed middle, bailing out hard-pressed homeowners, helping local communities, giving people a break — there is a risk of much of it disappearing in the wind.
All of the above are laudable goals. But making ongoing commitments in relation to higher spending or lower tax on the basis of the cascade of corporate tax would be asking for trouble. True, the Department of Finance calculates in its forecasts that from 2024 on the exchequer will be in surplus, even subtracting what they call the windfall element of corporation tax — which is the polite way of referring to the bit related to international tax planning rather than to real activity in Ireland.
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If this happens, there may be some leeway to boost ongoing programmes — but let’s wait and see.
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While the idea of setting cash aside in an investment fund has gained support, the risk is that the nuance of what is windfall revenue and what is not will slowly be pushed to the background in the budget debate. Pressure will build in the Government parties to increase spending and cut taxes in several areas, focusing in particular on things that will visibly benefit people before the next general election — tax cuts, higher payments for welfare and other entitlements, and quickly deliverable projects like schools.
With the economy already operating at full capacity, extra cash in people’s pockets now will deliver an additional inflationary push, an unwelcome echo of the boom-to-bust cycles of the past. This may well be forgotten in a political argument that goes, roughly: “This is our money and we want some of it now.”
The State has huge investment needs and big bills coming from an ageing population, and we need to use this moment of good fortune to set a course to help to meet them. That should be the priority, rather than putting money in people’s pockets and spreading it thinly across the State.
The budget surpluses in the years ahead may, in time, help. We could get lucky, in other words
If the Republic wants to increase spending to help people in need, improve services, or cut income taxes, then best to plan to raise money in other areas to pay for this. The budget surpluses in the years ahead may, in time, help. We could get lucky, in other words. But we have benefited so often from such extraordinary strokes of luck on the tax front in recent years that relying on its continuance seems unwise, purely on the basis that if you keep betting on red, the ball is bound to land on black at some stage.
In a presentation to a US Senate Finance committee this month, economist Brad Setser of the Council on Foreign Relations, a US think tank, illustrated how American pharma companies now report the vast bulk of their profits abroad, despite the US being their most lucrative market. The Republic is one of the countries benefiting. Setser, a long-time critic of Irish tax policies, argued that Donald Trump’s landmark 2017 tax bill had driven investment and tax overseas and that some simple changes in US tax rules could bring a lot of the tax revenues back Stateside.
There is no suggestion of this happening in the short term, but the point is that the State has some key areas of exposure here and it is very hard to calibrate the risk.
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In the light of this, the Government needs to set a few strategic goals. Underlying this is the objective of helping the younger generations — through more houses, better public transport, stepped-up climate policies and a pot of money via an investment fund to help pay for things in the years ahead and thus keep taxes lower than they otherwise would be. A better country for the future, in other words.
The Fiscal Advisory Council has noted that if we don’t start planning for an ageing population now —including starting to raise PRSI contributions and establishing a special fund — then those now starting off in their working lives will have to pay higher taxes to fund the pensions of those retiring. The older generation wins again, having already benefited from the decision to keep the State pension retirement age at 66.
Since 2016 total spending voted through the Dáil has risen from €56bn to €90bn
The alternative to taking this route is putting more money in people’s pockets now, a lot of which will go to the benefit of the comfortable, older classes who will be the chief beneficiaries of tax cuts ostensibly advanced to help the “squeezed middle”.
As the economy and population grow, Government spending is on an irreversible upward track. Since 2016 total spending voted through the Dáil has risen from €56 billion to €90 billion. Whatever election manifestos may say, in the area of government spending, the gap between what a Sinn Féin-led government and the current administration would be one of degree, not of direction.
Some of the €65 billion in surpluses over the next few years will be spent maintaining existing service levels. But on current forecasts, there will still be significant sums to spare. The Republic has an opportunity here. It needs to use it, imaginatively and with a longer-term focus. The political problem is that with an election now looming, this kind of planning, which involves holding some money in reserve now to ensure key goals can be met in the years ahead, is unlikely to win many votes. Bribing voters with their own money, on the other hand, generally works quite well. At the ballot box, at least.