Cabinet faces defining battle over how to handle the public finances

It would take quite a few weeks to calculate the cost of all the promises made and kites flown at the recent Fine Gael Ard Fheis: health spending should be maintained at pandemic levels, 40,000 homes must be built every year, an expanded social safety net including better sick pay and unemployment supports should be introduced, there should be a tax package in the budget.

On it went.

And this is the party meant to be at the prudent end of the political spectrum. You’d think a general election was coming – and perhaps the byelection in Dublin Bay South has something to do with it. And if the Government parties lose the byelection it will only increase the pressure to loosen the purse strings further. Meanwhile a scatter is on in Government about the housing plan due “next month” and more, much more, will be spent here.

It was perhaps no surprise that the two Ministers in charge of the national finances – Paschal Donohoe and Michael McGrath – gave what was described as a "sober" assessment of the outlook for the national finances to senior Cabinet colleagues a few days after the ardfheis. They will realise that the coalition is facing a defining period over the next couple of months, which will determine a lot for its remaining term in office.

Cliff Taylor: Post-pandemic decisions needed on working from home

---

Big decision looms for Paschal Donohoe over Ireland’s 12.5% corporation tax rate

---

Why does it take so long to build anything in Ireland?

---

Cliff Taylor: Reopening plan leaves no margin for error on vaccines

---

The big battle to come is about €14 billion; roughly the amount of money allocated this year as once-off spending to fight the pandemic. Public-spending Minister Michael McGrath separated this out from core Government spending for the precise reason that this spending was to be temporary. But now – entirely predictably – the Ministers in big-spending departments want to hold on to it.

If this temporary expenditure becomes permanent, then the Government will have little left to spend on other priorities later in its term. And it would leave the public finances exposed to any economic bump in the road.

Spending framework

There are, of course, good reasons to spend money: health, housing and so on. But there is a need to put some kind of a framework around this, based on what the exchequer will borrow and how the debt burden should evolve. The National Economic Dialogue hosted by the Government next week will hear of the need to restore order to the public finances, but will also involve Ministers setting out their stall to spend more on housing, health, the environment, jobs market supports and so on – and lobby groups calling for yet more.

The next steps will be hard to plan and are made all the more difficult by the uncertainty over reopening in early July. As things stand, the Department of Finance has pencilled in about €4 billion in special pandemic supports for 2022, allowing for ongoing help for the worst-affected sectors and higher unemployment next year. That is a €10 billion reduction on the Covid-19 spending this year – and it is due to be phased out completely by the end of next year.

On current forecasts a resumption of economic growth will help to cut borrowing to below 3 per cent of GDP next year, with the public finances moving close to balance by around 2025. But these forecasts have been criticised by the Irish Fiscal Advisory Council (IFAC), the budget watchdog, which has said they do not realistically cost in some key spending commitments.

The next key marker is the Summer Economic Statement, due in the coming weeks. Minister for Finance Paschal Donohoe said in the Dáil recently that this would include an “anchor” for the public finances – presumably a target level for the deficit. But other Ministers will realise that this will tie their hands in terms of spending. A big debate is under way within Government on this. A key question is whether Ministers realise that entering this crisis with the finances in balance has offered vital leeway. The decisions made in the weeks ahead will then kick on to the vital arguments coming up to the 2022 budget itself.

Interest rates

There is a wider argument here, too, about the appropriate targets for the public finances. Much of it depends on what happens to inflation – and thus to interest rates. If you assume interest rates remain low then the State has a bit more room for manoeuvre. And so ESRI research professor Kieran McQuinn argues that the State could afford to borrow a bit more to invest in housing.

Some things have not changed. One is that Ireland is a small country in a single-currency area and must keep the confidence of investors. A second is that the economy is bouncing – strongly – and so the need for extraordinary stimulus measures will recede, even if some sectors still need support. And a third is that if spending is going to be permanently higher, then some way has to be found to pay for this. Growth will do some of the job. But the repeated comments from Ministers that growth will do “the heavy lifting” are starting to wear thin. The IFAC estimates that all the room for manoeuvre from likely growth has already been used up by existing commitments. European Union budget rules, meanwhile, are likely to reappear in 2023.

Such is the scale of the spending commitments coming down the line – the ageing population, climate change, health, housing and so on – that it is clear choices lie ahead and priorities need to be identified. There is an air of unreality around about the public finances; a feeling across much of the political spectrum that there is no limit to what can be spent. It is better for the Cabinet to have the row now to sort out the parameters of where it is going. Otherwise it will continue to be pulled by politics into promising to spend here, there and everywhere, based on the vague promise that “growth will pay for it”.