Fianna Fáil and Fine Gael are heading into government with a group of rural Independents. And Sinn Féin, Labour and the Social Democrats are trying to organise themselves into a coherent grouping of Opposition. The spin is that this is to counteract an administration which is going to be pulled to the right. In economic terms, anyway, nothing could be further from the truth.
Perhaps the new government may take a harsher stance on immigration than one which had included, say, the Labour Party and a different view on some social issues. Or it may take a less climate-friendly approach than the outgoing administration, which had the Green Party on board. But look at the public finances. Government spending voted through the Dáil next year is due to be close to 60 per cent above its 2019 level. And this expansion in the size of the State is set to continue. This is neither right wing, nor right leaning.
Irish economic policy has shifted leftwards in recent years, driven by demands for more Government intervention in areas like housing and additional State protections — and by a desire of the outgoing Government to close off the rise of Sinn Féin. The vast bulk of the additional resources made available by the surge in corporation tax has gone on extra spending — and the election manifestos point in the same direction. A smaller portion has — wisely — been salted away in two funds to help fund future spending. Overall tax reliefs, in a period when exchequer finances have been flush with cash, have been minimal. Instead, households have been fed with a series of once-off payments which the Central Bank of Ireland this week calculated had come to a cumulative €11 billion, with just one-third of these fully focused on those who need it and the rest of more general benefit to all households.
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This is centre-left populism. And there is nothing to suggest the new government will take a different approach. It will continue to prioritise spending. Voters should discount promises of “tax cuts” which will amount to little more than, at best, adjusting the income tax system for inflation, plus a few other small concessions. The Opposition may huff and puff about yet “more” spending being needed in some areas — as Sinn Féin did in the last Dáil — but really the politically contentious points will come down to delivery, not direction.
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Everyone agrees the State should spend more. That debate is over and done with. It is competence in getting value for this and delivering tangible improvements that are in question. Talk of a new right-left divide in Irish politics is nonsense.
This could leave the “left” alliance a bit stuck in the new Dáil. Sinn Féin, Labour and the Social Democrats may be missing out on being in government during the last few years of the biggest surge in resources the State has seen. And competent delivery by the new government could close off a lot of lines of attack and leave the Opposition a bit stranded.
Throw in a possible hit to corporation tax and a weaker flow of inward investment as US president-elect Donald Trump takes office and it could get interesting
Of course, it could fall the other way. A lack of progress in tackling the big issues could allow the incoming coalition to be branded as uncaring and incompetent and lead to its flank of Independents becoming uneasy. Throw in a possible hit to corporation tax and a weaker flow of inward investment as Donald Trump takes office and it could get interesting. That is why a programme for government focusing on public sector delivery in all its aspects and taking a relatively cautious view of the public finances is what is needed.
And while the next government is going to spend rather than cut tax, it faces a crucial early test. This is stopping spending going off course again next year. Revised official figures published by the Department of Public Expenditure on Thursday show why this will not be easy. When the budget was announced in October, the figures indicated that spending next year — as measured by gross spending voted through the Dáil — would be just over 6 per cent ahead of this year’s levels. But the revised figures show the increase next year will be less than 1 per cent.
Now the allocation for 2025 has not changed. The reason that estimated spending growth has shrunk is that a string of supplementary estimates for government departments – extra money because they were overspending – have increased the figure for 2024. And of course, a lot of once-off payments to households were also put through in late 2024. For now, the Government is committed to holding voted spending at the budgeted level of €105.4 billion next year, which means departments will have to live within spending totals which are just above 2024 levels. They will have to accept that the 2024 bailouts were once-offs.
New governments have a chance to tighten up a bit on spending early in their term and focus on the important things
There is nothing surer than that pressure will come on these figures from two directions. One is from departmental budgets, as spending pressures remain intense. The second is from inevitable calls to make further once-off payments to households next year, to ensure they can maintain 2024 living standards. If the government gives in to either or both of these, it will be upping the existing bet that corporation tax will remain strong and increasing Ireland’s exposure to any problems in this area.
New governments have a chance to tighten up a bit on spending early in their term and focus on the important things. The next coalition needs to prioritise, ruthlessly, on delivery of improved public services and a better return for State investment. A programme for government based on their spendthrift manifestos will fail. The next coalition’s success, or failure, will not rest on its ideological position, but on its ability to deliver and to map a way through a potentially uncertain period for the economy and the public finances. There is no political division on the issue of Ireland needing a bigger and more efficient State. The question is how to deliver it. And, in future, how to pay for it.