Analysis: a giveaway budget may be attractive for Government TDs facing an election, but spending decisions must be based on prudence rather than populism
Whether the earlier than usual budget announcement this year is indicative of a November election, or the Government goes full term and the election is early next year, this will be the last budget the current coalition puts forward. The temptation to make politically popular choices is perhaps greater than ever and it is understandable to some extent that those seeking re-election want to have a positive message to relay on the doorsteps.
Add in figures released showing corporation tax receipts for August more than doubled compared to last year and the news that Apple will be paying us €14.1 billion in back taxes, the allure of a giveaway budget may be too strong for ministers to resist. However, with employment at an all time high and the economy operating at capacity, there is little justification for untargeted spending increases. Spending decisions need to be based on prudence rather than populism.
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From RTÉ Radio 1's Today with Claire Byrne, pre-Budget interview with Minister for Finance Jack Chambers
In recent years Ireland has been in an enviable position, with the public purse significantly boosted by taxes paid by foreign multinationals. But this revenue is highly concentrated, with a tiny proportion of firms (0.02%) paying 80% of corporation tax. A large amount of this money is considered 'windfall' because it is not a predictable stream of income. We can’t rely on receiving similar amounts in future years, because just one or two foreign companies leaving Ireland, or reducing their activities here, would lead to a significant drop in receipts.
Using this ‘windfall’ to fund permanent spending increases is inherently risky. The Government themselves acknowledge this and introduced a spending rule in 2019, committing to limit growth in core spending to 5%, a level they considered to be a sustainable budgetary position. However, they are not adhering to this limit and their plans will result in €12 billion more spent by 2025 than if they had followed their own rule.
Given the recent cost of living crisis, and the fact that price levels in Ireland remain high, voters might reasonably think that tax cuts and public spending increases to cushion the impact on consumers are justified. However, Government spending has a big impact on the economy and high levels of spending further increase the price level.
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From RTÉ Radio 1's This Week, Minister for Public Expenditure and Reform Paschal Donohoe on how Budget 2025 will have around €105 billion in spending
Analysis by the Central Bank found that breaches in the spending rule since 2022 have added 0.5% percentage points to inflation each year. To put that into context, not adhering to the spending rule will have a cumulative effect of adding €1000 to an average households annual bill. Increased spending that is not funded by revenue raising measures elsewhere will simply add more to future household costs. A giveaway budget would be something of a Trojan horse, creating the illusion of benefitting everyone but simply adding to inflation in the long run. Unfortunately, we can’t have everything, everywhere, all at once.
Prudent decisions in the upcoming budget need to consider the inflationary impact of Government spending and the distributional effects of recent inflation. High inflation rates over the past five years have disproportionally impacted the least well off.
Estimates from the CSO suggest that the price increases faced by the lowest income households were nearly 14% higher than the highest income households. The biggest contributors to rising costs for wealthier households were mortgage interest payments, restaurants, and hotels, while higher food and fuel costs had the biggest impact on low-income households.
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From RTÉ Radio 1's The Business, economist Colm McCarthy on how the Government should spent the €14 billion Apple windfall
While ECB interest rate cuts should lead to lower mortgage interest rates, benefitting higher income households, food prices are still rising and are 2% higher than they were this time last year. The least well off have already been hit the hardest by the cost of living crisis. Increased spending and tax cuts beyond sustainable levels in this budget will further increase price levels and inequality in Ireland. Recent research from the ESRI found that one in five Irish children last year experienced material deprivation, meaning that their households were unable to afford two or more items from a list of ten essentials, such as a warm coat and two pairs of shoes.
The Taoiseach has already indicated that the budget will be similar to last year, with another cost of living package likely. Measures that are being considered include increases in child benefit together with other universal measures, such as a repeat of electricity credits.
If the intention of such measures is to help those most in need, targeted payments would be much more effective at reducing poverty and would also have less of an inflationary impact on the economy. For example, a means tested second tier of child benefit costing €700 million would reduce the share of children below the poverty line by twice as much as increasing universal benefit by an equivalent cost amount.
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From RTÉ News Your Politics podcast, will the Government heed warnings about a Budget bonanza?
The €450 electricity credit payments last year cost €900 million, an amount that would more than cover the cost of a second tier of child benefit. Electricity credits were paid to all households, including the richest 20% who have almost four times the income of the poorest 20%. Rather than repeating this universal payment, the money could be redirected to those most in need.
Budgetary considerations necessarily involve trade-offs. A giveaway budget might create the illusion of putting some money back in everyone’s pockets, but it will simply increase prices in the long run. Given the current economic conditions it is hard to justify continued spending increases beyond sustainable levels. Perhaps if the Government decided to target spending increases to help the least well off in society, it might prove more popular with voters than throwing everyone a few quid.
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The views expressed here are those of the author and do not represent or reflect the views of RTÉ
