The Government is considering a paper from Minister for Finance Michael McGrath on what to do with the massive €65 billion budget surpluses expected in the years up to 2026. So what are the options?
From the most conservative to the most spendthrift, here is what could be done.
(1) Pay down some of the national debt
Ireland’s national debt is now more than €225 billion, having risen sharply during the pandemic. One option is to deploy some of the surpluses over the next few years to reduce the cash value of our borrowings – for example by repaying loans which mature from cash, rather than rolling them over into new debt as would normally be done.
Ireland’s national debt is relatively high – the Department of Finance calculates it amounts to €44,000 per head of population. The department’s latest forecasts see some decline in the cash value of the debt in the coming years – to about €225 billion by 2026 – but the Government could decide to accelerate this.
Why do this? High debt does loom as a risk for the future – it could reduce options if the public finances take a turn for the worse. Lowering national debt would also reduce the burden on generations to come in terms of making repayments. The two budget Ministers, McGrath and Paschal Donohoe, will argue for some cash to be used for this purpose. Other Ministers may argue that there are not too many votes in cutting the national debt.
(2) Put some money away in a fund
Last year, then minister for finance Paschal Donohoe established a National Reserve Fund – the fund for a rainy day – into which €6 billion has now been paid. The Cabinet will hear proposals for a much bigger fund with a longer-term mandate, a kind of sovereign wealth fund of the kind set up by oil states such as Norway. (Technically, this would also lower our net national debt – as it would be building up assets.)
This money would be invested over the years and the hope would be that the returns would help support the public finances in years to come. A big reason for doing this is that the State faces huge costs in the years ahead from the ageing of the population – including in particular increasing State pension bills – and also the costs of climate change. Returns from a fund would help pay these bills in the years ahead. They might also help to ensure the State could continue to invest in the years ahead if the public finances tightened, trying to break the boom-to-bust cycle.
Agreement is likely on this fund in principle, but the key thing will be how much money goes into it, the rules under which it will operate and in particular how the money will be used. There may be a push and pull here as some Ministers try to ensure that the Government’s room for manoeuvre is not restricted heading into the crucial budgets before the next general election.
The €65 billion question: how to spend the massive budget surplus
(3) Boost State investment in the next few years
The Government is already planning to boost the amount the State spends in areas like health and housing in the years ahead, under the National Development Programme. Spending by the State on investment is due to rise to almost €18 billion this year. With a projected surplus of €16 billion next year alone, it is a good bet this planned investment will be increased a bit in key project areas.
A key issue is that the economy is running at full capacity. Even if the Government spends more money now on the key area of housing, actually delivering more homes will not be easy at all, with the economy and construction sector at full capacity, a shortage of builders and the planning and regulatory delays we have heard so much about. And a spending surge would risk pushing up construction inflation and thus the cost of delivery. Nonetheless, some increase in spending here is likely.
(4) Increase day-to-day spending or cut taxes
These are the higher risk options. That is because the Government and other forecasters warn that much of the corporate tax base could quickly disappear – perhaps up to €12 billion of the €24 billion annual revenue should be defined as “windfall”, the Department of Finance argues, and thus vulnerable. And we saw before what happens when the State takes on ongoing spending commitments on the basis of potentially transitory tax revenues.
Current, or day-to-day, spending is already rising, of course, and this will continue. The surplus will inevitably provide more options for the budget in areas such as welfare and income tax. But introducing big, new, ongoing spending programmes would not be wise, at least until we get to a point where the finances are in surplus, even accounting for the windfall element of corporation tax.
The bottom line: All four options are likely to be chosen – the key think will be how much money goes into each pot and how the Cabinet balances arguments for prudence with the immediate needs of the economy and short-term political popularity.
