Cliff Taylor: Big budget uncertainty if Michael McGrath heads to Brussels

A summer madness is sweeping across the Government parties and the Civil Service. The imminent appointment of Ireland’s EU commissioner and the seemingly-endless speculation about the date of the general election have the rumour mill turning fast. At least one of these questions – the commissioner appointment – will have to be clarified shortly. The leading contender is Michael McGrath who, as Minister for Finance, has the rather important job of preparing the key pre-budget statement due in a couple of weeks, together with the package itself. If he is going to be moved, and a replacement put in place before the Dáil rises for the summer, it has to happen soon.

In turn, this triggers questions about what all this means for the budget and whether we could see rows and tensions during the summer. The key relationship at the heart of budget policy – McGrath and Minister for Public Expenditure Paschal Donohoe – would be fractured, with unpredictable consequences. The timing of this could hardly be more awkward, with the Summer Economic Statement expected during the week of July 8th, containing vital decisions on the shape of the budget package and in particular the expected increase in spending next year.

The Fianna Fáil leader is now in the box seat. Micheál Martin could ask McGrath to stay on and complete the pre-budget summer statement, departing over the summer. At a stretch – some have speculated – McGrath could even announce the package itself, though this would require the budget date being brought forward, to fit in with the likely schedule of European Parliament confirmation hearings in the autumn.

But this looks unlikely. To paraphrase the radio ad, when you’re gone as a minister you’re gone. If he chooses McGrath for Brussels, Martin would surely want to appoint a new minister. On a Machiavellian view, he might even feel a new appointee would be more pliable than the often inscrutable McGrath, who in tandem with Donohoe has held the middle ground on the public finances. Both have been stuck in the middle, facing criticism from the Fiscal Council for spending too much and engaging in “fiscal gimmickry” to cover their tracks and from Cabinet colleagues for not spending enough.

Cliff Taylor: Big budget uncertainty if Michael McGrath heads to Brussels

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For Budget 2025 they have in effect taken €6 billion off the table in terms of new spending and tax measures by planning to funnel it into two new funds, to help pay future bills. This should limit the scale of giveaways, but another big budget package is still in the offing.

The question is just how far the Coalition will go – and where the money will be spent. There is a strategic direction that the budget should take – but politics will pull in a different one. Economics says to invest. Politics says to put money now into people’s pockets. Inevitably the budget will do a bit of both. The question will be the balance.

McGrath’s departure could leave Donohoe in a solo battle to try to keep some control on spending plans while fighting off misguided attempts for a rerun of the cost-of-living package, involving another round of universal payments such as energy credits. This would be a blatant attempt at vote buying and would threaten to undermine any claims by the Coalition of budgetary prudence. The argument that these are “once-off” supports is already an abuse of the English language.

What the budget needs to do is to show a focus on the vital social and economic investments that the State needs. There is a difficult balance here for sure, trying to invest more when the economy is at or near full capacity. Investment in housing, energy and water infrastructure, hospitals, schools and so on is central to creating more headroom in the economy – but, in the short term, spending too much, too quickly could, as the Fiscal Council and the Central Bank have warned, fuel inflation and waste money.

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But this is where the debate needs to be. Deciding instead to focus on doling out money via big spending rises or tax cuts – beyond what is needed to compensate for inflation and deal with areas of hardship – reduces the scope to invest by using cash. And it also adds to demand and inflationary pressures, making managing vital investment even more difficult.

The surge in corporation tax has allowed these trade-offs to be largely ignored in recent years. And households did need support through Covid-19 and the cost-of-living crisis. But the theme of Budget 2025 needs to be underpinning growth for the future and trying to use the huge resources now available from multinational tax payments to improve living standards and the growth potential of the economy in the longer term, not to line people’s pockets so that they will vote the Coalition back in to office.

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The national finances do give scope for a big pre-election budget for next year, no doubt dressed up in the rhetoric of “helping families”. But the important things governments do involve the longer term – and there are huge issues now facing Ireland with housing and social services not fit for purpose and worrying lethargy in delivering vital economic investments in areas such as energy and water. Unless a way is found to focus and speed delivery, there is a risk of failing to take full advantage of an extraordinary period of buoyancy in the public finances and leaving little to show for it.

Yet, depressingly, the interesting work of the Commission on Housing – including the creation of a new agency to really push housing delivery – has been shunted off to an interdepartmental committee in a classic Yes Minister manoeuvre.

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The other test for the budget is the even less electorally attractive one of prudence. For now, Irish politics will continue to double its bets on corporate tax continuing to roll in. But at a time when political change in Europe – notably in France – is leading to some shudders in financial markets, it is essential that Ireland has enough financial buffers in place if the corporate tax party ends. We know that there are big risks if corporation tax falls off. And that budgets will get tighter in the term of the next government as the costs of an ageing population and the climate transition rise, necessitating higher – not lower – taxes before long. But these inconvenient truths are likely to be largely ignored by the Coalition on budget day and by all sides in the general election campaign that will surely follow shortly after.