First shots fired in the Government’s budget battles

Long before the two budget ministers present their package in October, ministers, TDs, lobby groups and supplicants of all hues spend hours in rooms with large tables wrangling and rowing over budget measures, allocations, tax cuts, and the rest.

The venues and the personnel change, but the line-up is essentially always the same: the Department of Public Expenditure and/or the Department of Finance are on one side, trying to keep a lid on spending increases and budget giveaways, and everyone else is on the other, looking for more money.

It has started early this year, for the last budget of the Coalition before the general election.

Both Fianna Fáil and Fine Gael used their recent ardfheiseanna to propose a series of tax cuts and spending increases, each apparently trying to get ahead of the other.

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Simon Harris was not yet in the door of the Taoiseach’s office when he promised his ardfheis that there would be help for businesses and farmers, tax cuts for middle income earners, cuts to the universal social charge (USC) – the post-crash income tax that replaced the income and health levies in 2011 – and 250,000 new homes by 2030.

‘I don’t think big bazooka budgets work in elections,’ the Fianna Fáil leader told RTÉ. Medium-sized bazookas, though, that’s a different matter

A week later, Fianna Fáil leader Micheál Martin was more specific, telling his party’s ardfheis that he would be “pushing very strongly” for a €10 increase to child benefit in the budget.

Anything else? Well, a €12 per week increase for pensioners, maybe; more energy credits; free schoolbooks; further childcare subsidies; increased tax credits for renters, and cuts to the USC. The Government, however, would be cautious, Martin and his colleagues insisted.

“I don’t think big bazooka budgets work in elections,” the Fianna Fáil leader told RTÉ.

Medium-sized bazookas, though, that’s a different matter.

Despite what you might be inclined to think listening to 90 per cent of political debates, however, the Government – while certainly in an extraordinarily fortuitous fiscal position – does not have unlimited financial resources.

As Cliff Taylor pointed out in his Smart Money column this week, the shortly-to-be-legal obligation on the Government to put €6 billion into its long-term savings funds means the budgetary arithmetic is a lot tighter than it looks.

This week, the two budget ministers – Minister for Finance Michael McGrath and Minister for Public Expenditure Paschal Donohoe – made their first public attempt (there will be many private ones) to limit the demands for extra spending that will inevitably pepper the government’s public and private discussions over the coming months.

[ Coalition's budgetary war chest balloons as election nears ]

They published the Stability Programme Update (SPU) – a document detailing the current fiscal position and expectations that forms the first concrete step in the process that will lead to the Coalition’s final, pre-election, budget in October.

In recent years, there is always a game afoot here. The Department of Finance tries to warn about risks, about the potential unreliability of corporation tax revenues and the dangers of building enduring spending commitments on the back of transient revenues. In fairness, this is a real concern.

The problem for the finance hawks of late is that by the end of the year, corporation tax revenues have invariably beaten expectations. And even if there are (again) recent signs that the great gushing geyser of money might be easing off, there is a sense among many ministers that the Department of Finance is like the boy who cried wolf. The point of that story, though, is that the wolf turned up in the end.

Ministers will continue to press for more spending in their departments. The McGrath-Donohoe axis of prudence (as they would have it) will continue to resist what they see as excessive demands. So where will we end up in October?

The SPU suggests that without policy changes the Government will run a surplus of nearly €10 billion this year. That indicates there will be scope for a substantial giveaway budget in advance of the autumn.

Could it be as big as last year’s €11 billion budget day giveaway, which included one-off measures, as well as tax cuts and permanent spending increases, again this year?

“Absolutely,” says University of Limerick Professor of Economics Stephen Kinsella. “They’ve got something like €26 billion to €30 billion in cash. They’re incredibly liquid at the moment.”

A budget of at least as great a magnitude as last year is certainly the expectation across the Government.

[ The budget is still six months away but the Coalition is showing signs of losing the plot ]

Kinsella adds, as an afterthought: “Though it was incredibly liquid in 2006, if you recall.”

This is the fear that haunts the Departments of Public Expenditure and Finance: that they will repeat the mistakes of the past and build up big spending commitments that the country will not be able to afford in the event of a downturn.

That’s one of the reasons why the Government adopted, early in its term, a rule that it would not increase spending by more than 5 per cent (calculated by long-term trend growth plus inflation) a year.

In theory, this was an example of a government agreeing to tie its own hands to prevent itself succumbing to short-term political pressures – a classic act of good long-term governance. In practice, it has proved impossible to adhere to: the rule has been broken every year.

This week, neither Donohoe nor McGrath was willing to commit to keeping the 5 per cent rule this year either. At this stage, it might be more accurate to describe the effective rule as spending must increase by “at least” 5 per cent a year. Or maybe, more fairly, the real rule is: don’t go too far above 5 per cent.

Several sources involved in the process stressed that the two budget ministers had gained significant experience in recent years resisting spending demands and delivering a sustainable fiscal policy

In a note circulated to investors in response to the SPU this week, Goodbody Stockbrokers chief economist Dermot O’Leary noted the emerging spending pressures and pointed to the importance of the rules.

“We note also the calls for further fiscal measures following the appointment of the new Taoiseach and in advance of the next General Election likely to be held in March 2025,” the Goodbody note said.

“It is important that [the Government] adheres to its own rules (such as the 5 per cent spending growth rule). There has been slippage on this in recent years.”

“Irish fiscal policy tends to be pro-cyclical,” O’Leary later told The Irish Times, “and that increases coming towards an election.”

Several sources involved in the process stressed that the two budget ministers had gained significant experience in recent years resisting spending demands and delivering a sustainable fiscal policy. Though they admitted that the political reality meant there would be an election budget.

“There will be a long-term plan to keep the public finances in good shape,” said one person closely involved in the budgetary process. “And a short-term plan to win the election.”

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