Election 2024The Economy

Election 2024: Will the public finances allow the spending spree to continue for the next government?

Government has breached its own 5 per cent spending limit each year since its introduction

The Opposition will attack the Government over housing, public services and spending waste. Photograph: Chris Ratcliffe/Bloomberg
The Opposition will attack the Government over housing, public services and spending waste. Photograph: Chris Ratcliffe/Bloomberg
Cliff Taylor's picture
Cliff Taylor
Sat Nov 09 2024 - 06:00

Governments claim credit for pretty much everything that goes right on their watch and get the blame for what goes wrong. That’s politics. In reality there are many other influences on what happens, not least – in Ireland’s case – the health of the world’s economy, where the outcome of the US election has raised new uncertainties. Governments rarely “create” jobs or “build” new homes, but these are inevitably how debates are framed.

So how do we assess the Coalition’s term of close to five years in office? In summary, the economy has grown strongly under its watch and job numbers have soared. The public finances are in strong surplus. But it has struggled to get to grips with the housing crisis, vital infrastructure delivery is slow and a few big projects have gone way over budget. Huge resources are available to the State – the challenge is to deploy them effectively.

This frames the election debate, which will see the Coalition warn that electing a Sinn Féin-led government would threaten economic growth and prosperity, while the Opposition attacks the Government over housing, public services and spending waste.

In the middle, the issue of the public finances had looked like it might be parked. However the threat to corporate tax revenues from Donald Trump’s policy platform has moved this issue back into the frame, even if it remains to be seen what the new president actually does. The Coalition will point out that it has moved the budget into surplus and is now putting aside money in two new funds to increase the resilience of the public finances. This would help to cope with any hit over the next few years and this is an issue the Government parties will play up.

READ MORE

Bodies such as the Central Bank and the Fiscal Advisory Council have warned that the Government has been increasingly running risks by spending more than it promised, at a time when the Exchequer finances are vulnerable to any fall-off in corporation tax. The Economic and Social Research Institute (ESRI) took a more relaxed approach, saying the bigger size of the economy justified higher spending, but that greater focus on value for money was essential. The Opposition wants to promise higher spending too and the Government will try to target Sinn Féin on this issue. Close attention will be paid to the public finance forecasts from all sides.

The general election manifestos will be based on the public finances remaining in good health, but the risks from Trump policies do create some concerns here. The Department of Finance estimates that subtracting what it estimates to be the " windfall” element of corporation tax payments - the bit not related to economic activity here - would wipe out of the surplus and move the Exchequer into deficit. Despite similar warnings dating back several years, corporation tax has continued to surge, doubling since before Covid-19. Now, nobody knows what happens next - but Ireland’s increasing reliance on a few big US companies is obvious.

This multinational boom has also contributed to strong jobs growth. The strongest part of the Government’s record is an extraordinary rise of almost 600,000 – or more than a quarter – in the numbers at work in its time in office, now at a record high of 2.754 million. Despite fears of a longer-term hit to employment during the Covid-19 shutdowns, a brief hiatus was quickly overcome and employment surged again in its wake. The Government deserves credit for the quick introduction of temporary measures to help families and businesses during this period.

Rising employment has also boosted the incomes of many households. Wages have grown strongly too. But inflation took a chunk out of spending power in 2022 and 2023, with the ESRI estimating that real earnings – after higher prices are taken into account – fell between 2021 and 2023, as prices jumped by 14 per cent. Household spending power is on the rise again, on average, but high prices continue to leave many feeling squeezed, particularly those paying high rents. And the future of the jobs boom is now in some question, if there is any hit to foreign investment or the world economy more generally.

Despite all the noise, income tax and USC measures in recent years have not done much more than keep pace with inflation and – crucially – household incomes have been supported by once-off measures, creating a dilemma for whoever takes up the reins next. If these are not repeated, then some households will be worse off. These measures were a good strategy during Covid-19 and then when the cost-of-living crisis hit, but need to be replaced by a longer-term strategy of permanent measures.

The flip side of rising employment and strong growth – and the resulting increase in the population – has been ever-increasing pressure on housing, transport and other social infrastructure and services in areas such as health, education and childcare. The jobs boom attracted tens of thousands of immigrants – about two out of every five jobs since 2021 were filled by non-Irish citizens – and the size of the population has risen way ahead of forecasts.

So while voters have found it easier to get jobs and are now seeing their real incomes rise again, the housing crisis, the difficulty in finding a school or childcare place and the creaking parts of the health service have a real impact on living standards. Developments in energy and water infrastructure are slow, raising concerns about longer-term security of supply and about Ireland’s plans to develop wind energy, crucial to making progress towards meeting climate targets. There is a fear that Ireland cannot “deliver” in these areas and it is unclear whether the Planning Bill, passed in the Coalition’s final weeks, can make a significant difference.

The Coalition is politically exposed here – and the Opposition will try to cash in on what might be called the competence question. The response of the Government parties will be that they are now spending heavily to try to make progress on these key issues. The electorate will have to decide who can actually deliver, meaning that the election campaign should itself be important, even if the complex issues lying behind long-term delivery are not straightforward, nor easily fixed by whoever is in power.

[ Michael McDowell: Why is our capacity to deliver infrastructure projects worse now than it was in the 19th century? ]

This debate on housing and services has influenced Government policy in recent years and lies behind a big increase in the pace of spending increases and of investment plans for the future. A key question here is the extent to which the public finances will allow spending to continue to increase so rapidly, with the Government busting its own 5 per cent spending limit each year since its introduction, particularly in 2024.

[ Five economic battlegrounds that could affect the next election result ]

Longer-term forecasts for the public finances suggest room for manoeuvre will gradually close, with more taxes needed at some stage to meet the costs of an ageing population and climate change. Now the question is whether pressures will start to emerge more quickly, if corporation tax receipts start to fall back. If they do, then this issue will have to be dealt with in the early part of the next government’s term, cutting room for manoeuvre on tax and spending.