Splurging the corporation tax windfall in exchange for votes would threaten the nation’s future

By delaying the gratification from spending the bonanza today, the State will get much better value for money

The 1994-1997 government under John Bruton managed the public finances sensibly but lost the election. Photograph: David Sleator

The current strength of the economy reflects careful management of the public finances in recent years, yet eaten bread is soon forgotten.

The 1994-1997 coalition also managed the public finances sensibly at a time when the Celtic Tiger was taking off, but that government lost the election, leaving the fiscal cupboard full of goodies. The current government must be aware that they face a similar danger. This will pose a temptation to spend some of the temporary bonanza of corporation tax revenue over the next two years in ways that would contribute little or nothing to the long-term welfare of the nation. However, that would risk big future disruption if the revenue stream fails. In the run-up to 2008, what proved to be temporary revenues from a property boom fuelled a public spending spree. We know what happened next.

As the Department of Finance repeatedly says, half of the corporation tax receipts today must be considered a possibly temporary windfall gain. As this risky revenue amounts to 4-5 per cent of national income, a reversal could have a truly dramatic effect on Irish living standards. While that may not seem imminent today¸ we know that unforeseen events, affecting only a few important foreign companies, could throw the economy into a tailspin.

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For this reason the Government has rightly decided to save the windfall, so that we don’t get hooked on the revenue. At a time when we face big challenges, especially in housing and climate change, this can be difficult to explain, but it is undoubtedly the right decision. By saving the exceptional revenue, the government will help ensure a steady growth in living standards in the future. By delaying the gratification from spending the tax bonanza today, the State will get much better value for money. It won’t be fuelling inflation by spending it in an economy already at capacity.

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We face obstacles to quick results on the housing crisis, and on climate action, first because of a sclerotic regulatory system. In addition, ramping up investment in a fully-employed economy means diverting the physical resources needed to undertake construction from where they are already being fully utilised.

If money could solve the housing problem the government would have an easy task. However, one cannot just import houses or buy them in kit form from Ikea. Instead they have to be built on land that’s subject to planning and other regulations, and they have to be built by people living here, most of whom are already very busy at work. The difficulty and cost of finding a place to live here is a deterrent to attracting building workers from abroad, who might otherwise help ease this constraint.

Whether the Government puts the budget surplus into a separate fund, or uses it to pay down debt, is a secondary issue. Either way, setting aside the money today provides insulation against future shocks. If we are lucky, and the revenue continues to flow, it will help sustain living standards in the future in the face of an ageing population.

The Department of Finance’s Stability Programme Update, published on Tuesday, gave headline forecasts for the economy out to 2030. These are important in planning future investment. They also help understand the pressures on greenhouse gas emissions.

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The department’s central forecast sees growth slowing from its average of about 4.5 per cent a year since 2013 to half that over the rest of this decade. This slowdown will, in the first place, be because the ageing of the population means that the growth in the labour force is likely to ease dramatically. In addition, the increase in productivity, which has sustained rising living standards since the financial crash, will also be lower than in the past. The department acknowledges that if migration proved higher than they anticipate, growth could be more rapid. However, it is only if productivity grows faster than expected that it would translate into the kind of rise in living standards seen over the past decade.

An advantage of the strength of the public finances is that the planned investment by the State for the rest of the decade should be easily funded. Instead of the wasteful stop-go experience of the 1980s or the financial crisis years, investment in principle can be planned and rolled out in a seamless manner, ensuring better value for money. However, that steady growth in investment can only happen if the Government, and its successor, successfully tackles the administrative and regulatory obstacles, and can successfully grow the building workforce.