On budget day, the focus of attention is on how changes in taxes and expenditure will affect us as individuals. We have become used to annual giveaways. Demands from interest groups and public expectations are that the budget set-piece will bring material improvements.
However, the budget plays a vital role in managing the performance of the economy, both today and in future years. The importance of budget day policy for the longer-term welfare of the public is often forgotten in the focus on immediate changes to our personal circumstances.
On many occasions in the past, budgets, which were generous and widely welcomed when announced, have turned out to have very serious long-term consequences. Prime examples were the budgets for 2005 to 2008. When tax revenues collapsed after the 2008 crash, it proved exceptionally painful to remedy the fiscal profligacy of earlier years.
It was very unwise in Tuesday’s budget to use up what may be ephemeral corporation tax receipts on long-term tax and spending commitments. When these volatile revenues are excluded, the Department of Finance estimates the underlying Government deficit will rise from €7.4 billion this year to €13.6 billion in 2026, a rise of 84 per cent.
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This is an underlying deficit of 4 per cent of national income at a time when the economy is booming. Up to now, it has been accepted that much of the exceptional revenue should be saved for the rainy day, when we face big bills for a much higher share of elderly people needing support and care.
Inevitably, the world economy, and Ireland’s, will slow down in coming years. If the tax bonanza from a few firms dries up, we face the prospect of painful cuts in the level of services we’ve become accustomed to, tax hikes, or both.
It was a serious mistake in the budget to plan for big increases in health and education spending without ensuring a stable revenue base to pay for them through appropriate new tax measures. While better services are a popular demand, they need to be paid for. And raising taxes would dampen growth in the economy, and release capacity in the labour market to staff expanded public services.
The booming job market, especially post-Covid, has attracted people from abroad – including returned emigrants – for the vacancies that cannot be filled at home. However, it is exceptionally difficult to create enough housing to match the growth in labour supply and in population. That is driving up rents and house prices, and seriously impacting people’s lives. Tackling this challenge was a key task for the Government in the budget.
To build new homes, it is essential to invest in key infrastructure like water, sewerage and electricity supply. The budget, correctly, has confronted this challenge head on and is planning a massive increase in necessary investment next year. This will cost almost 1 per cent of national income.
Delivering this will require a big increase in construction employment. In a fully employed economy, finding workers will be challenging. Additional building jobs will add to housing demand and prices in the short run. Nonetheless, the investment will lead to more homes in future years and is essential. However, it will be difficult to deliver all the planned investment within the year because of problems hiring the necessary skilled staff and with chronic planning delays.
The expansion in hiring more teachers, SNAs and healthcare workers will add around 0.5 per cent to total demand in the economy, and will also fuel further housing inflation. Our health and social care services in particular rely on recruitment from abroad.
The experience of the last few years also shows the dangers of “one off” measures. While the Government may think they are temporary, none of the recipients do and they are upset when temporary subsidies, such as on student fees or electricity bills, are discontinued.
The Government had to find roughly an extra €50 million to make a permanent cut of €500 in student fees, while those fees are actually going up €500 compared to last year.
This Government is in its first year in office – a time to take difficult decisions. The increase in investment is a desirable strategic measure that will prove fruitful in the coming years. However, there is a serious danger that, given international economic headwinds, the large spending package may have to be rowed back in future years – closer to the next election.
A wiser budget for 2026 would have put more of the volatile tax revenues aside and built up stronger reserves to pay for future care needs of an ageing population.
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