The economic facts have changed rather drastically in the past 12 months and Paschal Donohoe and Michael McGrath – the two budget-influencing Ministers – have changed their minds, abandoning a tough rule introduced to limit expenditure growth to give themselves leeway for a substantial giveaway budget.
In truth, maintaining the level of spending discipline they imposed on themselves last year was not politically possible in the current environment. Economists may cavil at any spending increases in a strongly inflationary environment but politicians must respond to the public, or they will find themselves ex-politicians pretty quickly. And at a time when the exchequer is bulging with unexpected tax receipts and cost-of-living increases are squeezing people hard, it is impossible not to share some of that plenty.
But for all the billions they will be giving away in September, Donohoe and McGrath have withstood significant political pressure to do more, from inside and outside the Government, and to do it earlier. They didn’t do a summer package and the extra €1.7 billion spending they have committed to in the budget will not break the bank.
But they will undoubtedly face pressure to increase it. So they have given themselves a clever way out – McGrath acknowledged that there will be scope in the budget for additional “one-off” cost-of-living measures that would not automatically recur next year.
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Pre-budget statements are often as inward-facing as they are outward-facing: in other words, the document published on Monday must be understood as part of a message to their
colleagues that Donohoe and McGrath are prepared to open the spending taps to some extent, but they are not prepared to let them gush uncontrollably.
Demographic pressure
It is true that €6.7 billion is a lot of money, but break it down and it doesn’t seem so large: €3 billion is already accounted for by the pressure of demographics, commitments already made and the need to preserve the “existing level of service”; over €1 billion will be taken up with tax measures; and €400 million is earmarked for budget day announcements (that are not one-off measures and will recur) that will begin this year. Much of this will be taken up with as-yet-unagreed public sector pay rises. That leaves, as McGrath noted, just €2.3 billion in new spending on budget day.
Out of this must come the cost for next year of any new public sector pay deal. Public sector unions have already rejected a pay offer which would have cost the exchequer in excess of €1.2 billion, and Ministers have indicated that an improved offer could be made over the coming weeks.
So although they have broken their own rule, the statement represents something of a political victory for McGrath and Donohoe. Under significant pressure, they have kept their spending increases – just about – on the prudent side of the ledger. To manage this when inflation is going gangbusters is one thing; to do it when corporation tax is gushing into the exchequer’s coffers is a deft political manoeuvre.
And this was the key message that the two Ministers gave to their bosses and their colleagues in recent weeks – the corporation tax revenues cannot be relied on, and difficult times are coming.
The internal threat of fiscal recklessness – as Ministers naturally jostle for extra resources – is one thing; the external threats, which include but are not limited to the effects of the Ukrainian war, the threat of Russia shutting off gas supplies to Europe, rising interest rates and volatile tax revenues, are a lot scarier. A very difficult economic vista is opening up for the medium-term future.
