There has been surprisingly little by way of public rows in the Coalition about next month’s budget. Don’t expect this to continue. Behind the scenes, the budget tensions are already brewing. It is only a matter of time before this breaks out into the open.
All sides know that the first budget of a new government is defining in important ways. A host of different issues have already been identified as “priorities” – housing, child poverty, squeezed family budgets, childcare, disability, infrastructure and helping small business, to name just a few. But if everything is a priority, nothing really is.
And there is more. Money has been set aside for housing investment in the revised National Development Plan, but recent poor figures will lead to pressure for additional measures. And the programme for government promises income tax relief for households, provided the public finances remain healthy. Which, on the face of it, they are, even if there are underlying frailties.
But there simply isn’t enough cash in the pot to address all these at once, while also meeting the usual departmental demands.
As happened in the last Coalition, the two main parties are fighting to claim key measures as their own idea, and to blame the other side for problems. In particular, Fine Gael has attached itself to the promised VAT cut for hospitality, dubbed a “solemn promise” by Tánaiste Simon Harris. It is not specifically mentioned in the programme for government, but Ministers subsequently supported it. But in Fianna Fáil – and quite possibly on the Fine Gael backbenches – there is restlessness about the impact of this on the size of personal tax cuts.
The Coalition has allocated €1.5 billion for a tax package as part of a €9.4 billion budget. Even if, as seems likely, the VAT cut covers just food and not bedrooms, it will cost more than €650 million in a full year. Delaying its implementation until the summer season would reduce this cost, though would also indicate a decidedly halfhearted approach to the whole thing.
The cost of the VAT cut will seriously reduce what is left for a personal tax package for households. And this comes as we are told there will be no cost-of-living package and thus no energy credits or double child benefit weeks. This means the cash take for households in this year’s budget will be much less than last year’s pre-election giveaway. Adding the tax cuts and one-off measures together, a typical middle-income single employee would have benefited by up to €1,000 from the income tax and energy credits in last year’s package. This could conceivably fall between €700 and €800 this year. And for a family with two earners and two children, the gains could fall from €2,800 last year to, perhaps, €1,600 this year.
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What are the optics of this when a VAT cut, as well as helping small food outlets, will also help the giant fast-food chains? And will do nothing to hold down prices for consumers? Will this consume all the relief directed at businesses, leaving firms outside hospitality a bit miffed?
The Coalition was wrong to go with additional universal payments last year and is right to phase them out this time. But that does not make it any easier politically. It will try to sweeten the pill, for example by increasing the tax credit paid to renters again and possibly extending the mortgage tax credit. Its childcare package will have to go a bit further to put cash back in the pockets of some households. And a permanent cut in the student registration fee is likely, though here again households may end up paying more than the €2,000 they did last year.
You can just hear the Opposition attacks, though the Sinn Féin calls for €450 in energy credits would cost not far off a whopping €1 billion. This would just be entrenching an approach to budgeting that risks leaving Ireland with little to show when the period of plenty in the public finances comes to an end. It could still play well with households, however. And other Sinn Féin attacks will nail the Government on some of its own promises, such as the lack to date of a published plan to meet its promise of reducing childcare costs to €200 a month over its term.
A plan to invest in housing, infrastructure and in permanent improvements in services such as childcare and health is the Government’s best shot at persuading voters to put up with less cash in this year’s budget. But its credibility problem from poor delivery during the last Coalition’s term in many areas is a problem here. At times, the last government looked like the gang who couldn’t shoot straight.
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Ministers seem to be showing more urgency now – and a recent plan on competitiveness provides some hope. But we have still to see key strategy documents, not only in childcare but also in the vital area of housing and its medium-term fiscal strategy. It is not yet clear, in other words, how everything will be brought together and whether the required urgency can be injected to actually get things done and overcome the key barriers in areas of public administration.
This will feed into the budget rows, too. There is a sense of real uncertainty about what to do on housing, with the latest planning permissions figures pointing to little progress, despite a host of schemes put in place by the last administration. Will the Government plough on with these, or will it add new policies, for example potentially costly and controversial tax breaks for developers? All kinds of question raise themselves here, including whether such breaks could even work in an era where the banks are limited in what they can lend in this area.
Plugging the investment costs in housing and infrastructure into the budget sums makes it clear that growth in day-to-day spending needs to slow. This is what budget Ministers Jack Chambers and Paschal Donohoe are trying to do. There will be battles underway with all the big spending departments to achieve this – and real heartache about additional budget-day measures and the trade-offs involved. For a Coalition that got to power on a flood of promises to do better this time, the first big crunch point has arrived.
