The election campaign has got off to a spluttering start on economic and budget issues. Will it burst into life as the election day approaches? Here is what it all means.
1. Should I believe all the promises on new spending and tax cuts? Best to be cautious and to see them as intended directions of travel, rather than precise commitments. There are two big reasons why budget promises are often not delivered.
One is that economic conditions may change and not enough money may be available. A few weeks after the last election Covid-19 hit and led to a complete recasting of budget policy. Now we have the very uncertain impact of a new president in the White House on foreign direct investment and tax.
The other issue is that any government will be a coalition and so a policy programme will require compromise. For example, Fine Gael wants a permanent 11 per cent VAT rate for hospitality. Fianna Fáil wants the low 9 per cent rate which currently applies to household energy bills to be extended for five years. Both of these things can’t happen together, as EU rules limit the number of VAT rates.
2. Are the budget costing credible? Only to a point. The various items in party programmes are costed by the Department of Finance. The parties then plug these into wider five year financial strategies, add all the numbers together and stamp them as “fully costed”. However, some other European countries like the Netherland, Belgium and Austria have independent bodies that assess the total budget plans put before the electorate on a like-for-like basis. Here, a body such as the Parliamentary Budget Office, (PBO) an independent unit within the House of the Oireachtas, could provide a valuable similar function.
3. What have we seen so far? Fianna Fáil is the only one of the big three parties to publish its full manifesto so far and thus its five-year financial forecast. This led to a spat with Fine Gael who said Fianna Fáil hadn’t explained €5.2 billion of savings and revenues – €3 billion for “efficiencies and compliance” and €2.2 billion for what is called tax buoyancy.
Fianna Fáil said the €3 billion includes around €500 million for tax compliance measures and €2.5 billion in efficiencies which it believes will emerge from measures such as digitalisation of the health service and other public service productivity measures. Higher productivity should indeed results from some spending programmes, though measuring it is difficult. The tax buoyancy measures relate to the economic impact of the extra spending the party is planning and do not seem out of line. A few more of these spats will emerge and this is where a full independent evaluation would be useful.
4. What is important in these budget plans? First, the direction. We know from the Fianna Fáil plan that it is focusing on spending, adding to existing official expenditure forecasts. Its tax measures might roughly index the income system for inflation, ensuring higher wages do not mean more tax. But the vast bulk of extra resources will go to spending.
We have still to see the Fine Gael plan which will come at the weekend. It may target a bit more on tax cuts than Fianna Fáil – we will have to see how the party proposes to pay for this as it has made big spending promises, too. Sinn Féin has also to publish its full manifesto but we know it is promising major USC cuts paid for by sharply higher taxes on the better off. It is also expected to target significant spending. It remains to be seen if it plans to continue the level of payments into two funds for the future to which the Government has committed.
So by this time next week we will have an interesting contrast with Fine Gael swinging a bit more to tax cuts on one side and Sinn Féin to more spending on the other. But more important is that all three of the major parties are promising to devote the vast bulk of the extra resources available to additional spending.
Interestingly, the most cautious plan published so far is from the Labour Party, which is making a virtue of avoiding the big tax and spending promises of the big parties. It got the PBO to model its assumptions. It says that net spending growth – as outlined in the recent Medium-Term Plan for the Department of Finance averaging 5.1 per cent from 2026 to 2030 – should be sufficient but also got the PBO to map the outlook with a 6 per cent annual rise. It does commit to index tax and welfare payments to inflation and factors in a public pay deal, as well as extra investment in areas like housing.
5. Are these rosy forecasts reasonable? There are big issues. One is domestic. The Fiscal Advisory Council, which has published a pre-budget online game to allow people put together their own budgets for the next government term, estimates that €7.5 billion would be available for extra budget measures each year. That is significant. However, it goes on to warn that about €1.5 billion will be needed each year to meet the cost of an ageing population – for example, more people drawing pensions – with a similar amount needed for capital projects already planned and €1 billion to meet the rising cost of buying goods or services for the public sector.
Keeping public pay and welfare in line with inflation would cost around €3 billion each, leaving just €500 million for “new” measures. The Apple cash gives parties some leeway in capital investment but the numbers still mean choices need to be made, or a bet placed that corporate tax revenues will continue to grow strongly. The ongoing pressure on spending from factors such as inflation and ageing are key in assessing budget plans and are likely to shrink the room for new measures.
And then there is the elephant in the room. Corporation tax receipts. With Trump in the White House threatening tariffs and tax changes, there are real questions about the outlook, particularly from 2026 on. The Department of Finance has forecast that corporation tax receipts will be €7.5 billion higher by 2030 (excluding the Apple impact). The Department also looked at the picture if corporation taxes stood still – which would reduce expected general government surpluses sharply – and a big fall-off which would immediately lead to significant deficits. Against this backdrop, an economically credible budget strategy would outline what the priorities would be in these two scenarios. But don’t expect to hear much about that in a general election campaign.
