The standard view in Government has been that, economically, the Coalition should hang on for as long as possible before calling the next general election. This was to allow a bonanza pre-election budget, more houses to be built and households to feel a bit better as the cost-of-living crisis eases. The second leg to this was a firm belief in Government that the next couple of years would be particularly good for the exchequer, so why risk allowing Sinn Féin in until as late as possible to start spending the cash?
Now, however, things are starting to look different. The case for an earlier election, perhaps in Spring 2024, is growing. The economic signals may not be flashing red, but there are a few amber lights appearing. There is no doubt that economic growth is slowing – and that this is not just a figment of our unreliable GDP figures. Higher interest rates and the cost-of-living crisis are slowing consumer spending. And weak international markets and a fallback from a Covid bounce in the pharma sector are leading to a sizeable fall in exports and a drop in corporate taxation. The jobs market is topping out.
There is nothing to suggest an economic collapse is on the way – and the near-record low in unemployment is a vital support. But for the Coalition this may be as good as it gets. The period of supercharged economic growth, driven by a flood of foreign investment, may be coming to an end. The economic froth that provided a lot of tax revenue to the exchequer may be slowly disappearing. There remains a strong group of big companies here that will underpin revenues, but only after corporate tax payments have fallen back a bit from their current level. And that could be a tricky adjustment.
This changes the political calculus. Slower growth will dampen the mood of voters, particularly as the benefits of the recent budget giveaways wear out. With prices remaining high and jobs growth running out of steam, living standards may stall. And there is always a risk that the international slowdown increases the problems here as next year goes on.
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Crucially, the fall in corporate tax receipts will change the sums for next year’s budget. By how much is hard to know. The budget surplus, on current forecasts, is due to be €8.4 billion next year and more than €14 billion in 2025. But we know that health overspending and a fall in corporate taxes are going to start eating into this. Economist Simon Barry has also warned of a possible fall-off in income tax growth, spotting some tentative signs of weakness in recent exchequer returns. Many of the biggest earners – and thus biggest income taxpayers – work in the tech sector, where numbers are easing back and bonuses and share options are not delivering as they were. This is also hitting to top end of the Dublin housing market.
Small enough shifts in spending and tax trends can quickly eat away at the forecast budget surpluses. The prospect of a giveaway budget in October of next year may be receding. And the central belief in Government that the next administration would have more money to spend than the current one is now very much open to question.
From the point of view of general election timing, ministers may still reckon that there will be enough funds for a reasonable pre-election budget next October. But the task of putting it together will be difficult. If inflation and energy prices continue to fall, for example, how could further payments of electricity credits be justified? Yet if they are not paid again – along with other “once-off” supports – there is a risk of households being a bit worse off next winter than they are this winter. And tighter finances would mean tougher decisions all over the place in terms of spending – on health, housing, supports and all the other things that matter to voters.
And then there is housing. Buoyed by rising completion figures, senior ministers were out this week predicting that overall building targets will be exceeded this year. Forecasters believe that up to 34,000 houses may be completed in 2023, and roughly the same next year. This is an improvement, though revised forecasts for the Government being completed by the ESRI will show more building is necessary. And while this year’s level of completions might plausibly be repeated next year, it is likely that the wall of money being thrown at the issue through various schemes will only really start to bear fruit in subsequent years. With a rising house building trend now evident, the Coalition could reckon that there is little to be gained from waiting another six months.
There is, of course, no perfect answer here. Political anoraks debate endlessly whether the Government would be better to go before the June European and local elections – where they could get a heavy beating – or afterwards. Lagging in the polls, the temptation is always to hold on and hope that something turns up to improve things. But sometimes it doesn’t.
Now the economy has turned and so there are risks to holding on too long. The extent of these will be clearer early next year, when we know what has happened to tax receipts over the balance of 2023 and how the jobs market is looking. And a vital call for the Coalition will to decide when is the best time to play its experience and prudence card as the economy slows. Certainly, by early next year the changing public finance trends will be evident.
The key argument of ministers is that a Sinn Féin-led Government would mess everything up economically and drive away investment. Sinn Féin’s case, meanwhile, is that it is time for “change” and new approaches are needed, particularly in housing. Both of these arguments look different in a slowing economy with less cash to spend and the trade-offs getting sharper. No longer will it be possible to increase spending significantly, cut taxes, announce a surplus and still put cash away for the future.
The public finances, in other words, rather than being taken for granted, will be back as an election issue. Stick or twist? The early months of 2024 are starting to look very interesting.