Cliff Taylor: We are witnessing the first skirmishes in a new war for resources in Ireland

The debate over the Government’s cost-of-living package signals the start of a new phase of the age-old economic debate in Ireland about who gets resources and who pays.

The reason it is different this time is that the world has changed. The era in which governments could borrow at zero interest rates is over at precisely the time new pressures are starting to emerge on our national finances: ageing population, the need to pay for climate change and the political consensus that the State needs to spend more to deliver housing, better healthcare and so on. We will all face higher tax bills to pay for this – even if our politicians aren’t keen on telling us.

During Covid-19, the European Central Bank (ECB) was pumping cash into economies and keeping interest rates on the floor so that governments could borrow. Billions were – correctly – committed. Now we face what could be a prolonged cost-of-living crisis, and the ECB is warning governments to pull back on supports, with the implicit threat that if it does not do so interest rates could go yet higher.

If another €200 energy credit is announced for May, for example, that would mean huge pressure for the same next autumn and winter

The surge in energy costs and the rise in the price of other imports has left the country worse off. Fuel imports last year cost €7 billion more than in 2021. That is income lost to Ireland. The political decision is where the burden falls and who should be compensated. Politically, dividing losses is much tougher than sharing out gains.

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The political debate on this is framed by the changing backdrop – the exchequer finances right now are flush, but as well as warnings about longer-term pressures, ministers will worry about what the slowdown in growth will mean for tax revenues over the next two or three years. There is a feeling that the extraordinary run the country has had with rising tax revenues must surely be drawing to a close.

The key issue in the decisions being made this weekend is not the short-term cost, but whether new, permanent or semi-permanent commitments are being entered into. If another €200 energy credit is announced for May, for example, that would mean huge pressure for the same next autumn and winter. At €400 million for each credit, the costs could rise significantly. And if energy prices stay high, does that imply semi-permanent exchequer support for household bills?

The same thinking surrounds the tax measures. If the lower 9 per cent VAT rate for accommodation, food and other sectors such as hairdressing is extended, it will cost the guts of €500 million this year. That could be affordable. But the real question is whether doing this would effectively make it semi-permanent. The same goes for lower excise on fuel, where there are also climate-change issues.

There are no “right” or “wrong” answers here. Politics is all about deciding where resources are raised and spent. But what we need to do is recognise the trade-offs – that spending more in one area leaves less to spend elsewhere, or requires money to be raised. The long era of low interest rates in recent years and the extraordinary surge in tax revenues put this debate in Ireland on hold. There was enough around to cut taxes, increase spending and cut borrowing, eventually moving the public finances into surplus.

But the trade-offs are back now. Over the next five to ten years the State will need to find new tax resources to pay the bills. This is despite the massive additional resources from corporation tax in particular in recent years, which has allowed a big expansion of State spending.

Trade unions, in a smart move, are focusing on the idea of a ‘social wage’ – what the Government can deliver in areas like childcare and health to improve people’s standard of living

Chapter four of the excellent report of the Commission on Tax and Welfare spells it out. It concludes that “the net level of revenue raised from tax and PRSI should increase materially in the medium to long term.” Otherwise, it warns, Ireland simply will not have an adequate tax base to take account of all the pressures emerging on spending.

In this context it is interesting to see the various parties lining up on the cost-of-living issue. It may well be a sign of things to come. Fianna Fáil and the Greens, in public statements anyhow, are underlining the need to protect those hardest hit.

So too is Taoiseach Leo Varadkar, but he has made considerable play of the need to support the squeezed middle and households in general. Fine Gael faces particular challenges in deciding on its message over the next few years as its promises of tax cuts for middle earners will be impossible to deliver – or at least if the choice is made to cut tax on income, then it will require additional resources to be raised elsewhere. If your income tax bills fall, you will be caught somewhere else.

Being in Opposition gives parties more freedom. Sinn Féin will shout “more” in response to any Government package, without fear of the fiscal consequences. It favours more tax on higher incomes and inheritance, and a wealth tax. It will be fascinating to see what choices it makes in its platform for the next election.

Elsewhere in the system, positions are being taken too. Employers, facing the near-certainty of higher PRSI costs – the revenue from which politicians on all sides have spent a few times over – warn that they are facing rising costs on all sides. Social lobby groups argue that welfare increases need to be permanent, not temporary, as the cost-of-living crisis has made an already bad situation worse.

Trade unions, in a smart move, are focusing on the idea of a “social wage” – what the Government can deliver in areas such as childcare and health, to improve people’s standard of living, in addition to wage increases.

These are just the initial skirmishes in the next war over how resources are divided in Irish society. The rise in interest rates and pressure on the public finances are about to make the political choices much sharper. The debate over the cost-of-living package is just the start of it.