Politically, this budget is tricky territory. As one long-term observer put it, when there is a deficit, ministers have to make decisions. This year, for Jack Chambers and Paschal Donohoe, it has been more a question of trying to hold back the tide of demands. The backdrop is a large budget surplus of more than €25 billion this year, confirmed in the latest figures. This is inflated by the need to account for the expected arrival of close to €14 billion from Apple. But even subtracting this, the exchequer is in strong surplus, and on current forecasts this will continue into next year and beyond.
This has, perhaps inevitably, led to what will be another bumper package next Tuesday. For households, this will be best seen as the tale of two budgets. The first part of Budget 2025 will, in fact, be an adjustment to Budget 2024. It is a string of once-off payments – energy credits, double child-benefit weeks, special welfare payments and so on – which will be paid out by the end of 2024. They will give a once-off boost to household incomes this year, just as a general election comes into view. They are a reflection of the fact that despite a big fall in inflation, prices remain high and living standards for many are squeezed. Once introduced, history shows that payments made to people are hard to phase out.
These measures will help the households involved but are at best temporary fixes, and not answers to the problems of poverty or the needs of the less well-off. And in the case of universal payments such as the energy credit, they benefit rich and poor alike – and thus a portion of the money is wasted on those who don’t need State support. But they have emerged as a kind of compromise over the past couple of years – giving temporary support to households during the cost-of-living crisis but not pushing up permanent Government spending. Much of this was fair enough as the crisis hit out of the blue, but Ireland now needs to move on. A big question is how to use the strong budget surpluses to address social problems such as child poverty, long waits for vital medical treatments and inadequate support services, while keeping the public finances in a safe place.
Public confidence has been undermined by slow delivery to date and the latest fiascos over the bike shed, the security hut and the national children’s hospital
In large part, this is a question of priorities. The hundreds of millions spent on energy credits this year could, for example, make a real difference if directed more forensically to areas of need. But a lot, too, comes down to the tedious and difficult job of ensuring that extra money spent in areas such as health actually delivers improved services.
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Part two of the budget is what we think of as the normal fare: the permanent tax and welfare changes which come into force next year. Fianna Fáil is grabbing credit for a one-percentage-point cut in the main USC rate, leaving Fine Gael to hang its hat on a rise in the level at which people enter the higher tax rate. The extent of welfare and pension rises will be sorted over the weekend, but most look set to rise by €15 a week. While these will all be trumpeted as “giveaways”, many are just compensating for the impact of inflation on taxpayers and welfare recipients.
Selling this mix to voters is going to be complicated and the Coalition risks a lukewarm reaction given the hype in advance of the budget and the wide spread of the money being spent. Promises of yet more being spent on housing and infrastructure are welcome, but public confidence has been undermined by slow delivery to date and the latest fiascos over the bike shed, the security hut and the national children’s hospital. Delivery is the Achilles’ heel of the Coalition as the run to try to catch up with the explosion in the workforce and population.
It is, of course, a lot better to be facing these issues with a big surplus than with a yawning deficit. France is reportedly going back to the European Commission to ask it for more time to get its budget in some kind of order. The Labour government in Britain is battling black holes and a rising national debt. Ireland entered Covid with its public finances in surplus, which has given vital leeway over the last few years. Now the finances are back in the black. And while this creates political pressures, it is time to focus on the opportunities these surpluses give to the State.
The first is to deal with whatever economic shock comes next, and in a politically uncertain world the odds on this happening are high enough. To take just one risk, a Trump presidency could lead to trade wars and have a big impact on exports to the US from the pharma sector – a key taxpayer – and future US investment. The budget, in other words, needs to stay in surplus to absorb future shocks.
The second opportunity is, of course, to deal with the huge deficits in housing, water, energy, schools and hospitals from a rising population and more economic activity. To underpin growth for the future, in other words. The immediate problem here is not money – it is a lack of capacity to build, and a planning system which all too often favours sectional interests rather than the national good.
At some stage, too, financial pressures will re-emerge – by 2030 the costs of an ageing population will be sharply on the rise, for example, and there are huge costs from combating and adapting to climate change. Some of the surpluses now can be set aside to help pay for this and ensure investment can continue over a five- to 10-year time horizon. We can, if we choose to, break the boom-and-bust economic cycle which has bedevilled Irish economic history and mitigate against the need to raise taxes in future at the expense of younger people now entering the workforce.
The frustration is that despite such big surpluses, Ireland is struggling to deliver on the vital upscaling of our national infrastructure and public services. We are running to catch up in so many areas. Ireland needs to find a way to navigate between the necessary caution due to the reliance of the public finances on a few big corporations on one side and the need to plan and invest for the future and improve public services on the other. Right now, there is enough money to do both. But with the economy running at full capacity ramping up investment even more in the short term is difficult - there are not, for example, many free construction workers, planners or engineers.
The Economic and Social Research Institute (ESRI) concluded this week that Ireland could afford its spending plans for the next few years, but that it was vital that the money spent delivers improved services in areas such as health and education and efficient delivery of housing and infrastructure. A mindset change is needed. Ireland has the money – spending it well is the challenge.