The publication by the Government of a medium-term strategy for the public finances covering the period to 2030 is welcome, if long overdue. It raises two questions, however. One is whether the revenue projections will be met – requiring economic growth and corporate tax buoyancy. The second is whether it can survive contact with the political reality of Ireland’s huge deficits in housing and infrastructure and constant demands for more spending on services and household supports.
That such a strategy was required is beyond doubt. The annual budget statement has become a document which , in terms of spending, is now seen as a target by Government departments rather than a limit. Annual spending overruns running into billions have cumulated to leave the public finances ever more dependent on potentially transient corporate taxes.
The new plan is an attempt to get this situation under control. Minister for Finance, Simon Harris, has said there will be a “ fundamental change” in budgetary strategy. A new limit of around 6 per cent on average on annual spending growth has been set. Ending the successive overruns will be central to achieving this. It will also require budgets which are less generous than those seen in many recent years.
Neither of these things will be politically easy. Overruns often happen in so-called demand-led schemes in areas like health and education. Spending ministers and their departments typically threaten damaging cuts to services if extra cash is not forthcoming.
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Gaining better control on current spending is vital if Ireland is to afford to put sufficient cash into investment projects outlined in the recent infrastructure plan. But to do so will also require tax revenue growth – and for this the economy and corporate taxes must both remain healthy.
To lower the risks, the Government is committing to continuing to put cash into two longer-term funds and to keep the budget in surplus.
However, details of the medium-term plan show that while this might allow the State to work through a temporary fall-off in corporate tax payments, a more permanent decline would cause significant difficulties. And even if corporate taxes were to just stop growing, challenges would soon appear. As the Fiscal Council has pointed out, Ireland is continuing to increases its bets on this potentially transient source of revenue.
The planned slowdown in spending growth and tighter budgetary control promised in this latest plan simply must be delivered. And if corporation tax comes in higher than expectations, more should be set aside rather than spent. Even if all this is done, however, our public finances will remain uncomfortably reliant on a few big US companies and on a continuation of healthy economic growth.
