Budget game is now afoot but difficult few months lie ahead

Sitting at the top of the TK Whitaker Room in the Department of Finance last Monday afternoon Paschal Donohoe and Michael McGrath formally kicked off a budget season that will test their partnership and the wider Government as it has not been tested before. A difficult few months lie ahead.

There was a time when the budget was revealed on the day in a burst of excitement. Finance ministers loved it.

No longer. Maybe the need to make headlines and dazzle the audience contributed to several years of unwise budgets in the 2000s; maybe not. Either way, there has been a conscious move away from the razzmatazz and what-will-he-do-next nature of the event. Now there are EU rules that have to be followed. The European Commission is kept abreast of plans. The Summer Economic Statement is published in July, which sets out the budget day parameters. It’s all more technocratic and predictable, more European.

The dilemma

Nonetheless, the dilemma the two budget Ministers faced when constructing the statement, and will face when finalising their budget, was the same as their predecessors — too many demands on their resources to keep everyone happy. This year there were a few more special conditions pushing and pulling on the politicians and the officials who do their bidding.

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For a start, the western world is in the midst of a deep inflation crisis, exacerbated by the war in Ukraine and the sanctions on the aggressor Russia, which is squeezing the real incomes of citizens everywhere. There is mounting political pressure on governments to intervene — both by reducing the cost of the things people have to buy, such as fuel, and by providing more money for them to buy these essentials. Governments everywhere have been doing that; Ireland is no exception. Oppositions and electorates everywhere have been saying that it’s not enough; same here.

In Ireland’s case this has been coupled with an unusual bedfellow — booming tax receipts that are flowing into the exchequer. All parts of the economy have rebounded quickly from the pandemic but the multinational sector has taken off: corporation tax receipts have surged, providing Donohoe and McGrath with an unexpected €4 billion surplus for the first half of the year. This is a good problem to have, but if you’re trying to keep the lid on spending demands — not just from the public but from your Cabinet colleagues as well — you can see how it might complicate things.

The manoeuvre

Sources concede that the Department of Finance might have been a little vague about the scale of the corporation tax bonanza during discussions in the run-up to the finalisation of the statement at a special meeting of the Cabinet on Monday. This has caused a good bit of grumbling from some Cabinet colleagues.

But Donohoe and McGrath still faced the problem of dealing with the spending demands and the cost-of-living pressures while not building in huge expenditures that would recur every year. When the Government agrees welfare increases or public sector pay hikes, it is not just increasing spending for that budget year, it is building these expenditures into what they call “the base” — in other words, they recur every year.

This is especially a concern because the Government is being bombarded with warnings from all sides that the extraordinary boom in corporation tax revenues may not last, but may well fall away in future years. This week the Central Bank warned that up to half of Ireland’s corporation tax receipts this year — one senior official reckons that number will hit €20 billion by the end of the year — could disappear in the coming years. The Ministers are terrified of building permanent spending commitments on the back of temporary tax revenues. Ireland did that before, with stamp duty during the economic boom of the 2000s; it did not end well.

The manoeuvre that McGrath and Donohoe conceived to answer the political demands for more spending while maintaining a degree of spending control next year was a simple but clever one. Though this wasn’t highlighted in the document, during the subsequent press conference both men conceded that there would be scope for “additional one-off measures” on budget day. These will not form part of next year’s spending plans, but will rather be late additions to the this year’s budget.

People involved in the decision-making process expect that a large package of cost-of-living supports, many of them payable immediately, will be unveiled on budget day. Many of them will be the sort of one-off payments that the Government has already introduced, such as the €200 energy rebate or the €100 increase in the back-to-school allowance announced this week. It is this element of the budget that will garner most attention on the day; perhaps Ministers haven’t lost their desire for a bit of razzmatazz after all.

How big will it be? According to one senior Minister, certainly more than an extra billion euros. According to another, potentially a lot more. It will push the total budget day package towards — and maybe beyond — €8 billion.

The inevitable pressure

But whatever the number, it won’t make everyone happy — that’s the first rule of budget-making. And Ministers know that. Which is why they will now launch the most intensive campaigns for extra budget allocations that this Coalition has yet seen. Its first two budgets were constructed in the midst of the pandemic, and with unlimited borrowing facilitated by the European Central Bank, money was no object. The fiscal position in the future will be a lot more constrained.

It will hardly be the stuff of austerity. The Budget Day package announced on Monday — and this excludes the one-off stuff, remember — amounts to €6.7 billion. But factor in the cost of demographics and preserving the rising cost of the existing services (about €3 billion), an expected new public sector pay deal (probably €1.5 billion), adjusting the tax bands and other tax measures (€1 billion) and you’re not left with a whole lot of money to play with. The competition will be fierce, and the pressure will be intense. And the game is now afoot.