Budget battle lines drawn between Martin and Varadkar

The wrangling over how to spend Ireland’s massive projected budget surpluses — or indeed, whether to spend them at all — moved on Monday from Leinster House and Government Buildings to Dublin Castle where the National Economic Dialogue got under way.

The economic dialogue is meant to give the budget-makers the benefits of outside perspectives before they return to the behind-closed-doors business of formulating the budget. The exercise — which used to last for two long days, now it’s just one — was conceived as a formalised and public version of the private budget lobbying that takes place annually. Though insiders would say that it has supplemented rather than replaced that process.

In any event, the arguments about the budget are not exactly being conducted behind closed doors in recent weeks. Instead, they have been very public, with Taoiseach Leo Varadkar and some Fine Gael Ministers making a strong case for tax cuts for middle-income earners, while others — including Minister for Finance Michael McGrath — arguing for a prudent approach to spending the surplus.

Who speaks for 'middle Ireland'?

Listen | 46:48

Those differing perspectives were plainly on show at Dublin Castle in the contributions from McGrath and Paschal Donohoe, of the Tánaiste Micheal Martin and, most obviously, from Varadkar himself. While everybody paid lip service to prudence, the first three of these stressed it a lot more than the Taoiseach did. Varadkar made clear commitments on tax cuts. And also — this seemed pointed — he warned of the dangers of being too cautious.

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“As you know,” said Varadkar, “our limitation isn’t the public finances — we have the money — it’s the risk of fuelling inflation. We need to be conscious of that risk, but we have a responsibility to take decisive action on behalf of our citizens. I believe an overly cautious approach could see more people in poverty and financial distress.”

Later in his contribution, Varadkar elaborated: “What I’ve learned in 12 years of government is that there is a cost to excessive caution, to pessimism bias. The financial crisis, Brexit, the pandemic and inflation all have something in common. The worst impacts on the economy did not come to pass and we recovered more quickly than many predicted.

“If Government takes an overly cautious approach, in a cost-of-living crisis, it’s making a conscious decision to reduce living standards. That’s not something I can stand over given our fiscal position.”

This sounded very much like a line in the sand: I will take your prudence, he seemed to be saying to Donohoe and McGrath et al. But not too much of it.

Varadkar spelled out what this should mean in the budget.

“I believe middle-income earners pay too much tax and USC. It’s simply not fair that average full-time workers are hit with the higher rate of income tax. And it’s not fair that the tax system erodes any pay increase they do get, or overtime worked.

“In line with the programme for government, this budget should make substantial progress on lifting the point at which an individual pays the higher rate of income tax and it should also benefit all income taxpayers to ensure fairness.”

There would also, he said, be a “substantial welfare and pensions package” and he expected increases in public sector pay could be agreed over the summer.

There was a substantial contrast with the speeches and comments by McGrath, Donohoe and Martin, all of which tended more to recommend what the Taoiseach might view as excessive caution.

“The strong growth figures and strong budgetary position we are in today cannot be taken for granted and we cannot afford to undermine them with unsustainable policies,” Martin warned.

“We also have to make sure that we maintain a secure, sustainable and progressive tax base. In recent years the Government has been clear in implementing both tax and social support policies which are progressive … At a time of rising prices, our approach has been to benefit families widely and progressively.”

Notice how Martin uses the word “progressive” three times here. This will be a budget battleground: it will be hard to design tax cuts that are progressive — ie, that do not benefit those who are better off.

The National Economic Dialogue might be a bit of a talking shop. But it has illustrated the budget divisions within Government clearly.