Next Tuesday, Minister for Finance, Jack Chambers and Minister for Public Expenditure, Paschal Donohoe will present the national budget for 2025. It is the Government’s big financial set-piece every year. But what exactly does the budget do? And is it important, or an over-hyped piece of political theatre?
The fundamentals:
In the budget, the Government allocates spending for the following year and outlines where the revenue will come from to pay for this. While there is always a lot of “noise” on budget day about the economy and wider policy concerns, this is its fundamental function. Immediate tax changes – excise duty measures, for example – are voted through on budget night.
If the Government does not succeed in winning these votes, it would have to call an election. In 1982 Garret FitzGerald’s government was unexpectedly and famously defeated in a Dáil vote on budget night, leading to a general election.
The noise:
The Government of the day also uses budget day to outline the direction of policy for the year or, in the case of Budget 2025, to give pointers to its platform for the forthcoming general election. This is where the budget can get a bit unwieldy, promising more than one day’s speechifying can ever deliver.
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For example, the Coalition will make much play on budget day about policies in areas like housing, infrastructure investment and so on. However, while funds will be allocated to these on budget day, success or failure will result from decisions made right through the year and their implementation. And the vast bulk of the money to be spent in these areas – and right across all the Government departments – will have been allocated long before budget day itself, as the cost of maintaining existing service levels is factored in.
The juice:
But the budget does affect our living standards, right? It does. It contains tax and welfare changes which directly affect people’s pockets. Minister for Finance, Jack Chamber, has said that the average worker might gain around €1,000 from budget tax changes and the cost-of-living package. This is a significant sum, though does only amount to around €20 a week. Those who receive welfare payments also rely on annual increases to try to maintain or improve their living standards.
Arguments about how resources should be allocated in these areas, and discussions about the outcome, are the meat and drink of debate before and after the budget. The return of inflation in recent years has complicated these arguments – if the increase in welfare rates does not match inflation, then those reliant on them lose out.
Likewise, if tax credits and bands are not adjusted, then those getting wage increases will see a small additional portion of their income going in a stealth tax increase. So many of the things presented as “ giveaways” in the budget are really just keeping up with inflation.
But it also has a wider function - presenting and approving all the spending plans for the following year which underpin State services in areas like health, education and social services which are vital contributors to people’s standards of living.
The process:
The budget is part of a detailed process of planning and approval of Government taxes and spending. In recent years the budget “year” has changed to fit in with the EU timetable which require the plan to be submitted to Brussels well before the end of the year for an assessment of whether it meets the rules. There is a detailed lead up through a succession of forecasts and pre-budget documents, many discussed in committees such as the one on Budgetary Oversight. The Irish Fiscal Advisory Council, the budget watchdog, gives its view before and after the package.
After the immediate budget tax changes are voted through on Budget night, two key pieces of legislation will then be published and debated in the following week. The Finance Bill contains legislation to enact the tax changes and the Social Welfare Bill does the same for welfare payments.
The Government’s detailed spending plans must also be approved. What is called an Appropriations Bill is passed late in the year which gives legal effect to spending in the current year and, crucially, allows spending to continue into the following year until it is approved by the Dáil. Department figures are discussed in the following months by the relevant Oireachtas committee and voted on by the Dáll. These figures are not set in stone – but are meant to set limits each year. As we know there have been overruns consistently in areas like health.
When this happens the Government must seek clearance via a supplementary estimate, which is again generally dealt with by the relevant committee and subsequently voted through the Dáil. (For those who – really – want full details on these procedures, it is contained in what is called the “Blue Book” though the timing of the budget has been brought forward since this was written.)
There is also a block of Government spending which does not have to be approved by the Dáil, including debt service payments and contributions to the EU budget.
The Dáil votes at the end of each year to finally approve all the money used that year and this is audited by the Comptroller & Auditor General.
The Summer Economic Statement, the key pre-budget document, estimated that total Government spending votes through the Dáil next year would amount to around €105 billion, with around €90 billion of day to day spending and €15 billion of State investment. Social Protection, Health and Education are the biggest spending areas.
The “once-offs”:
Recent budgets have seen a new feature – a series of once-off payments designed to support households and businesses first through Covid-19 and then through the cost-of-living crisis. These are different as, unlike most budget measures, they only involve a commitment to one payment, though a number have now been repeated several times, such as the energy credits to households, making the “once-off” tag a bit questionable.
The Government has found itself in a pre-election bind here – inflation and energy prices are falling but prices are still higher than before the pandemic, meaning the cost-of-living squeeze continues. For this reason there will be another substantial package of “once-offs” including energy credits, double child benefit and welfare weeks and other cash payments. Most of these will be paid in the remaining months of this year – and so technically they are adjustments to this year’s budget, rather than part of Budget 2025.
The numbers:
This is going to be confusing this year.. Very confusing. In its key pre-budget document – the Summer Economic Statement – the Government indicated a budget package of €8.3 billion for 2025, of which €6.9 billion would be extra spending and €1.4 billion would be net tax reductions (in other words cuts minus any increases announced). In terms of the 2025 figures, there may be some boost to capital spending from the use of money from selling down AIB shares, which is to be allocated to investment projects like housing, water and energy.
This could amount to more than €2 billion, thought it is unclear how much might be spent next year and how much allocated to subsequent years. Then the Government has promised to spend some of the €2 billion surplus in what is called the National Training Fund – into which employers pay every year – to support training and education. Again, we don’t know how much will be spent – or when. So the announcements will cover additional spending over a number of years.
The best way of looking at it is that there will be two major parts of the budget – once-off payments largely made this year – which could amount of €1.5 billion – plus permanent tax and spending changes next year. And then there will be some add-ones to State investment spending in the years ahead.
The Apple money:
The €13.7 billion or so due to land from Apple will have a big impact on the budget figures. It will be counted in the 2024 budget surplus as calculated for EU purposes, even if Ireland does not actually get the cash until 2025. This will leave the State with massive cash balances, approaching €40 billion.
It is unclear what the Government will allocate the money to. The economy does not have the capacity to handle it all being spent quickly, but the Government will want to indicate it will be used to support vital investment in housing, water, energy and so on in the years ahead. This is likely to become an issue for election manifestos.
The bottom line:
Ireland inherited the budget system from the UK. it has been favoured by governments ever since. It gives the government of the day a set-piece opportunity and can also limit debate on key changes, even if the committee system has improved this over recent years. Other countries tend to present the budget over a longer time-frame and with less hoopla.
Budget day is, undoubtedly, over-hyped. Most Government spending and tax changes continue on from year to year and the changes on budget day are small, in proportion to the total. The Government will spend over €100 billion next year and the budget package will add perhaps 7 or 8 per cent to the total.
The changes in tax will be even smaller. And taking into account the need to adjust the tax and welfare systems for inflation the “ real” changes are even less. The budget does matter, however. It is the one time of year when debate tends to focus on the overall direction of Government policy and the trade-offs between spending in one area and another and where tax is raised.
