Cliff Taylor: Having ‘struck oil’, Ireland faces big decisions about what to do with all this money

The Department of Finance has been talking down the health of the public finances in recent years, warning that it could all go wrong if corporation tax receipts collapsed. This week, for the first time in a few years, it provided medium-term forecasts for the budget surplus – and they are going to completely change the political debate.

From 2023 to 2026, the department is projecting a cumulative budget surplus of no less than €65 billion. At a time when other countries are scrambling for cash, Ireland is swimming in it. The debate on October’s budget and the run in to the next general election have now changed – the question now is not where to get the money from, it is what to do with it.

To understand how this has happened, we need to go back to the story of Ireland’s two track economy – the Ireland Inc economy comprised of fast-growing multinationals and their ecosystem and the slower-growing, less well-off domestic sector. Such is the impact of multinational activity that, measured by gross domestic product (GDP), Ireland was the 28th biggest economy in the world last year and could now be around 25th.

Now we know GDP is a flawed measure. It showed the Irish economy worth €550 billion last year, ranking not far off rich countries with populations of up to 10 million, like Sweden, Belgium and Austria. Measures which try to adjust out the distorting impact of multinationals rank us a good deal lower – just inside the top 50. They make more sense, in terms of the economy most of us feel like we are living in.

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But here’s the thing. The supercharged multinational sector, comprised of a complicated mix of real economic activity and tax-driven corporate structures, has created large amounts of new revenues for the State, mainly via corporation tax, but also income tax from highly paid employees.

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We have got used to dismissing GDP as a flawed economic indicator – and it is. But look back to 2014, just before the latest surge of multinational investment started, and you can see that tax revenue has benefited hugely from the foreign direct investment factor. Since then, GDP has risen nearly threefold while overall tax revenues have doubled. In turn this has helped pay for a big surge in Government spending. Caught up in the pandemic – during which longer-term official economic forecasts were not made – and fears of an international recession, the long-term implications of this have not really been scoped out. Until now.

It would be unwise to expect this multinational-driven tax bonanza to continue indefinitely; there is a big vulnerability relying on a small number of taxpayers and the impact of the tech sector wobbles will be closely watched. But for now the money keeps rolling in and looking ahead there are factors which will push it higher, as well as risks.

There will now be an unseemly scramble to get hold of this money by spending Ministers and lobby groups from all sides. There is a chance of a lot of it being frittered away, yielding little long-term benefit – and opening up risks if there is some fall-off in corporate tax. Spending rules will limit budgetary largesse, but more cash in the economy either via expenditure or big tax cuts will only add to inflation and capacity problems.

As well as political pressure, money brings opportunity too. Look around and you see an economy which is not so much bursting at the seams as already burst. Not enough houses; not enough hospitals and doctors; not enough schools, or services for people with disabilities; not enough people to take up a lot of the jobs on offer and on and on.

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A new series of the radio show Queueing for a Living could paint on a really broad canvas. Ireland has a large capacity problem; the State failed to plan or invest for the big economic recovery after the financial crash and then the acceleration in both growth and the population after 2015. The multinational-fuelled surge took us by surprise. IBEC’s Danny McCoy was one of the first to argue that the State and its services were now simply too small to cope with the size of the economy and society.

Having money now gives Ireland a chance to address this and build some of this vital capacity, essential for our social and economic future. The problem is, however, that Irish politics tends to move seamlessly from one crisis to the next and is not good at longer-term planning.

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When a new wing of the Mater hospital opened during the week, the news was that it had been completed – most unusually – on time and on budget. It shows that it can be done. We need this type of planning and delivery a hundredfold across the country – and as we are short of builders, planners, architects, engineers and so on, it will not be easy. Working to ease all these shortages is part of the challenge, as well as the planning and regulatory hurdles which mean everything seems to take ages.

None of this work is politically glamorous. And the longer-term nature of it means it may not be rewarded at the ballot box. This Government and its predecessor have managed the public finances well, but have got little thanks for it. Now they face a decision. The Government could try to bribe the electorate with its own money in advance of the next election. Or they could make a genuine effort to use what may be a once-off boost to the exchequer finances to tackle the huge capacity deficits in housing, health and education. These deficits, which are holding the country back, could be addressed and public finances put on a solid track amid pressures from an ageing population and climate change. Ireland has struck oil and faces some really big decisions.