The debate on the forthcoming budget seems to be proceeding on two separate tracks. On one, eyeing the budget surplus, a variety of interest groups seek higher spending or lower taxes in particular areas. On the other, bodies such as the Irish Fiscal Advisory Council (IFAC) and the Department of Finance warn that the Government needs to be cautious and that the room for additional measures is constrained.
The council’s latest document, an assessment of recent official forecasts from the Department of Finance, is clear in its warnings. If the Government uses what may be temporary budget resources to commit to permanent spending and tax measures, then its risks repeating the mistakes of the financial crisis. Not only might it be faced with a hole in the public finances if corporation tax fell sharply, but it also risks boosting inflation in an economy already at full capacity.
Both points are well made. While the exchequer is flush at the moment, the IFAC’s own research has pointed out that one third of all corporation tax comes from just three big companies, bringing obvious vulnerabilities. And over the next few years the exchequer will face increasing costs from an ageing population and climate change.
How precisely to manage all this needs some debate, for example in terms of how the new State investment fund, being proposed by Minister for Finance, Michael McGrath, would operate. Ireland needs to find ways to increase vital State capacity in a range of areas – tackling shortages in housing, healthcare, education, energy infrastructure and so on. The IFAC report warns that additional investment in the short term risks fuelling inflation and getting bad value for money.
This is true, but equally a strong exchequer position should allow more ambitious multi-annual plans to be outlined in key areas. The political – and administrative – challenge is to ensure better value for money and find ways to clear the familiar logjams.
The Council has long warned about the costs facing the exchequer from a rising State pension bill. It argues that the new State fund could help to pay these costs – but that higher PRSI payments will also be needed. The National Economic Dialogue, the pre-budget gathering of interested parties due to take place this month, should discuss this issue.
But the debate will continue to be dominated by calls for more spending and less tax. Adjusting for inflation will indeed mean additional spending is required to continue to provide existing service levels, while income tax bands and credits will need to be increase if the burden on employees is not to rise. But beyond that, care is needed. The surge in tax revenues gives Ireland an opportunity – but it also presents some dangers.