Ireland’s spare billions have sent budget expectations sky-high. There’s a risk no one ends up happy

Despite the billions sloshing around this is going to be a tricky budget for the Government. Expectations are high, not least because of promises from Ministers of more spending and tax cuts. Many just can’t restrain themselves. However, unless the Government decides to throw caution to the wind budget day may well feel like a bit of an anticlimax. This would mean that two financial Ministers, Michael McGrath and Paschal Donohoe, had done their job. But other Ministers and backbenchers will fear that it will do nothing to improve their prospects in a general election, which could well come next year.

The electorate punishes parties seen as responsible for mismanaging the economy – but this happens after the event. Just look at how Fianna Fáil suffered following the financial crash. But in real time there are few votes in prudence.

McGrath and Donohoe did a decent job in the recent Summer Economic Statement of keeping things in check, holding the increase in planned permanent spending next year to just over 6 per cent. The Fiscal Advisory Council criticised them for breaching a self-imposed rule to keep spending increases at 5 per cent – though this looked more like a marker being put down than a quibble with a small amount of extra spending. The outline budget plans are for a package of permanent changes of €6.4 billion and a surplus for next year of €12 billion. Given the political pressures to spend, holding on to such a big planned surplus was a result for the Finance and Public Spending Ministers.

But it will be chipped away at before budget day. The battles are far from over. Many other Ministers will push for a repeat of many of the once-off measures which featured in this year’s package in response to the cost-of-living crisis, such as the electricity tax credits, once-off child benefit, pension and welfare payments and cuts to the price of some public services.

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McGrath and Donohoe will argue that these should be a lot more modest than last year, but will face an uphill struggle. The final budget package will be well in excess of €6.4 billion. The public finances remain strong and will be ahead of target this year despite yet another health over-run. “Sure we have the money” will the be refrain of the big spending Ministers.

The problem with repeating many of the once-off measures again is that they will then become semi-permanent, increasingly difficult to pull back on due to political expectations. We have all known in recent years that there would be a double welfare payment every Christmas even though this is never unveiled until budget day. Will the same now be the case for energy credits in winter? The higher the budget one-offs the less will be left to put away for the future to help pay some of the big bills we know are coming down the road.

The plan is to put the excess cash in three directions – into a long-term savings fund; a second fund to support State capital spending if economic growth slows; and into longer-term reductions in the national debt.

The long-term fund was the original idea announced by McGrath to help pay pension and other bills in the years ahead. The second infrastructure fund is to ensure Ireland doesn’t make the same mistake as it did during the financial crash, when State investment spending was slashed with terrible longer-term consequences. Cutting the national debt will mainly be achieved by not replacing maturing debt with new borrowings, but rather paying it off with excess State cash.

A flick of a few buttons on a computer in the west coast of California could put a hole in our corporate taxes. We need to plan on the basis that we are going through a temporary public finances boom

There are already scuffles under way on how much cash goes into each pot. The NTMA wants debt reduced, Ibec wants infrastructure investment and the Fiscal Advisory Council wants most of it put in a longer-term fund. But they will be like bald men arguing over a comb if the money isn’t there in the first place. Remember, we are dealing with huge uncertainty here in terms of future revenues, particularly for corporate tax receipts. We are planning a kind of wealth fund without knowing how rich we really are.

And we wait to see how much money will be left to allocate to these longer-term goals after the budget battles are over. Already there is a cacophony of calls for more spending – the constraints in the Summer Statement will limit what can be done in terms of permanent increases, but the pressure for once-off measures is growing. Tax cuts will also be a contentious area. The opening salvos are already under way in a debate which will mostly be behind closed doors as Ministers thrash it out.

The political risk for the Coalition is that no one ends up happy, even if a couple of billion of once-off measures – in addition to the cash being set aside for Ukrainian refugees – are added. The impact of inflation means more has to be spent just to stand still.

Talk of spare billions has raised the expectations of the electorate sky-high and sharpened the debate about the slow pace in attacking big infrastructure deficits in housing, health and across the economy and society. The large over-run and delay on the national children’s hospital seems symptomatic of a system which has the money but can’t deliver.

Facing into the next few months, McGrath and Donohoe will have to try to pull the familiar two-card trick, telling the public that the public finances are in splendid shape, while persuading their colleagues that there is little spare cash to spend. Their problem is that prudence does not win elections. But the Coalition has also to ask itself what it stands for. Does it want to chase Opposition demands for more and more spending? Or will it actually set out its stall on the basis of using the current period of flush resources to underpin the public finances and invest for the future?

Forecasts of huge budget surpluses over the next few years are, at best, a guess based on where we are now. Norway knew its oil was going to last for many years. A flick of a few buttons on a computer in the west coast of California could put a hole in our corporate taxes. Maybe it won’t. But we need to plan on the basis that we are going through a temporary public finances boom and ensure we take advantage of this opportunity. Public money can all too easily trickle away in many directions, leaving little to show for it.