Economic analysts and Irish governments operate in different spheres when it comes to the annual budget. Ministers may try to set long-term goals – at least for as long as the government term – but are inevitably buffeted by shorter-term political factors.
Bodies such as the Central Bank, the Economic and Social Research Institute and the Fiscal Advisory Council can afford to sit back and look at what an economically ideal budget might look like. They implicitly recognise the political constraints, but hope to at least influence policy in what they see as an appropriate direction.
The warnings from these bodies have become sharper over the last year or two. All are in broad agreement that the Government should not add fuel to an economy already at capacity. And that the underlying risks from a combination of fast growth in current spending, the need for State investment and potentially volatile corporate taxes have got out of line. As the Central Bank puts it, if the State is to invest significantly more, then day to day spending needs to be brought under control. If not, more taxation will be needed .
Politically, spending control and higher taxation are never popular options. The Government has started to recognise the longer-term issues, for example through the establishment of two funds to put away cash now to help pay for extra spending in future. Budget Ministers Paschal Donohoe and Jack Chambers are also, correctly, trying to end annual cost-of-living packages and get tighter control on current spending. But they face a battle both in negotiations on the budget and afterwards, with spending departments treating their budget allocation as a starting point, rather than a binding target for the year.
RM Block
Ireland has traditionally had a boom to bust economic and budgetary cycle. The point of controlling spending when times are good is to have more leeway when there is a slowdown, thus smoothing out the economic cycle. Managing risks to the public finances is a central component of this. As we saw after 2008, a public finance crisis coinciding with an economic downturn is hugely costly
Lurking behind these discussions are the uncertainties over corporation tax and foreign direct investment. The Central Bank is relatively optimistic in the short term about the impact of Donald Trump’s tariffs, but the longer-term risks are all too clear. And so are the challenges facing the public finances, as highlighted in detail by the Fiscal Council. This all seems a world removed from the reopening of the Dáil this week and the Opposition demands for large amounts to be spent on a cost-of-living package. The debate within the Coalition and between it and the Opposition is still stuck in an era of endless increases in corporation tax and a failure to face policy trade-offs. Unfortunately, in the real world, things have moved on.
