Stephen Collins: Government needs to stop worrying about a rainy day that might never come

Leo Varadkar observed earlier this week that during his 12 years in government he has learned the danger of excessive caution and the bias towards pessimism. The question is whether he can face down the pessimists inside and outside his Government and get them to do something radical to capitalise on the country’s current good economic fortune.

Speaking at the National Economic Dialogue in Dublin Castle, Varadkar took a very different line from the message of financial prudence articulated by Micheál Martin, Paschal Donohoe and Michael McGrath as he warned that an overly cautious approach to the next budget could see more people being pushed into poverty and financial distress.

“The financial crisis, Brexit, the pandemic and inflation all have something in common. The worst impacts on the economy did not come to pass and we recovered more quickly than many predicted. If Government takes an overly cautious approach in a cost-of-living crisis, it’s making a conscious decision to reduce living standards. That’s not something I can stand over given our fiscal position.”

The Taoiseach certainly does have a point that the prophets of doom have been proved wrong time and time again over the past decade. For one thing, the economy recovered from the financial crisis and emerged from Brexit and the pandemic in a far healthier state than anyone had predicted.

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Ireland is now facing the problem of what to do with an unanticipated surplus of €64 billion rather than having to deal with the widely predicted collapse in corporation tax revenues

Another is that the widely held assumption that the ending of the 12.5 per cent corporation tax rate would result in a decline in revenue to the Exchequer was not simply wrong, it was wildly inaccurate. The agreement on a new international minimum standard rate of 15 per cent has seen corporation tax revenue soar. Ireland is now facing the problem of what to do with an unanticipated surplus of €64 billion rather than having to deal with the widely predicted collapse in corporation tax revenues.

The paradox is that far from being grateful to the Government for the sound management of the public finances that has left the country in such a healthy financial position, the public appears to be clamouring for change. One reason for that could be that voters are looking at the massive budget surplus and asking why they are not getting a piece of it.

Unless the Coalition can find an adequate response to that mood, it is doomed. A budget in the autumn with a little something for everybody in the audience on the model of the last few is not going to cut it. What is required are bold and imaginative moves that can reset the political agenda and convince voters that the Government really wants to help them.

Dramatic initiatives

Fine Gael has identified tax cuts for middle income earners as a priority, but tricking around with bands and allowances will not be enough. It will take dramatic initiatives such as the introduction of a 30 per cent rate or the complete abolition of the USC to capture the public imagination.

One of the features of the Irish tax system is that middle- and high-income earners pay almost all of the income tax, which means they are a minority of the workforce, never mind of the population as a whole. However, they are a core element of Fine Gael’s support and they have grown increasingly disillusioned with the party over the past decade.

Of course, tax is just one area where the Government needs to come up with dramatic, eye-catching initiatives. Pensions and savings are other areas where a bit of imagination is required to help people without contributing to inflation. Ploughing most of the surplus cash into a new long-term fund, when we already have two of them, will impress no one.

One of the very few people to predict the scale of the economic boom as it began to gather strength a few years ago was the Ibec boss Danny McCoy

One of the problems facing the Government is that far too many people, including some key policymakers, are still operating on the basis that Ireland is a poor country which needs to be careful with its money, when in fact we are one of the richest countries in the world. The problem is not finding money to spend, but deciding how to spend the money already in the kitty to the best long-term advantage.

[ For the Coalition it's a case of more money, more problems ]

One of the very few people to predict the scale of the economic boom as it began to gather strength a few years ago was the Ibec boss Danny McCoy. His contribution to the National Economic Dialogue this week was to propose a new national infrastructure fund to address the major social, economic and environmental needs which Ireland is committed to meeting over the next decade.

“A failure to meet the pressing investment needs of the Irish economy over the coming years would represent a greater risk to future economic development and social cohesion than any potential future ‘rainy day’... Demand in the Irish economy will continue to grow strongly. A failure of domestic supply capacity and infrastructure to keep up is leading to significant congestion and constraints.”

He is surely right. It is time to stop worrying about a future rainy day and make the best use of the fine economic weather the country is currently enjoying to ensure that it continues far into the future.