A branch just fell off Ireland’s magic money tree. Should we be worried?

Be careful what you believe. A month of budget spin lies ahead. And this year it will be worse than ever as the political system tries to come to terms with the massive budget surpluses forecast for the next few years, and the Government tries to persuade us that it is both being prudent and doing all it can to help households out.

A branch fell off the magic money tree this week, the one that has been key to creating these surpluses – though few seemed to notice. In August corporate tax receipts fell by €1 billion compared with the same month last year, a drop of over one third. This may, or may not, be a blip. But we could, in time, look back on this week as a turning point. At least, we should see it as a warning of the risk of volatility from relying on three or four big companies for huge amounts of tax.

Ireland needs to treat the excess corporate taxes we are receiving now as a precious resource. Cumulative budget surpluses of more than €56 billion are anticipated for the period 2023 to 2026. These forecasts have caused the political system to lose touch with the value of money. Proposals are made on the basis of their affordability in the short term, rather than real need or value. The idea of three more €200 energy credits to all households this winter – costing €1.3 billion – is thrown around as if it was small change, despite the fact that household energy bills are now falling. It would be enough for the State to build a couple of decent housing developments.

If we see the job of the State as compensating households for whatever extra costs they face – energy bills, mortgages and so on – no matter what their income level, then the exchequer will always be running to stand still. There is a good argument to help less well-off households through the next phase of the cost-of-living crisis, but not to continue repeating general supports such as the energy credit, or introducing other general and costly measures like mortgage interest relief. Unfortunately, the energy crisis and the sharp rise in the cost-of-living have impacted nearly all households. However, trying to compensate everyone for this eventually ends up like a dog chasing its tail.

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But the Government has to be seen to act. And so watch carefully as the budget spinning starts. In the middle of the web are the two budget Ministers – Paschal Donohoe and Michael McGrath on one side and the three Coalition party leaders on the other. Donohoe and McGrath may be irked at the criticism from the Irish Fiscal Advisory Council (IFAC) this week, which said they risked repeating the mistakes of the past. And this did seem over the top given the impact of inflation and the big budget surpluses pencilled in;enough this year to cover the vast bulk of what the Department of Finance estimates is the windfall element of corporate tax receipts.

But the two Ministers will be privately delighted with IFAC’s chidings as it gives them a stick with which to beat their Cabinet colleagues and to try to dampen public expectations a bit.

Donohoe’s statement this week that the €6.4 billion budget, as outlined in the Summer Economic Statement, will go ahead as planned was classic Paschalling, distracting from where the row is going to be.

[ Budget 2024: What measures will we see - from tax and childcare cuts to electricity credits? ]

What has been outlined so far by the Government is the scale of the permanent planned changes in tax and spending. There will be disagreements about how this will be divided up, but there was never any question that a corporate tax wobble or anything else would throw this off course. It continues the broadly prudent course that the two men have trodden in recent years, aided by the corporate tax bounty.

This prudence could be overtaken by a string of once-off measures, not yet counted in to the sums and still to be argued over. The more of these are agreed, the more the forecast surplus of €16 billion next year runs down. There will be big budget rows here over the energy credits, potential payments of child benefit and welfare supports as happened last winter. Ministers will want the measures in their own areas this year to be repeated next year. Some €4 billion was spent on temporary measures last year, including spending on housing refugees. IFAC has warned, correctly, that the line between temporary and permanent measures is now becoming fuzzy as the so-called “once-off” ones get repeated.

Here the three party leaders face a big choice. Are they going to chase Sinn Féin-led demands to spread money now for “hard-pressed households”? Or will they try to help those who really need it and build up the warchest for investment and helping to pay big bills in areas such as climate change and ageing in the years ahead?

[ Cabinet agrees a €6.4bn Budget 2024 package after late-night leader talks ]

With a general election looming, they may reckon there are few votes in prudence. Irish households have shown huge conservatism in managing their personal finances since the financial crash, but this has not translated into obvious support for cautious management of the public finances. But the school of thought in Government which says roughly that the current administration should spend the money – because if they don’t a Sinn Féin-led government will do so – is surely questionable. The Coalition needs to decide what it stands for – and while budget day can only achieve so much, it is an opportunity to set out the priorities for the final part of the Coalition’s term.

This is linked to the second looming budget row – the rules about how money will be put aside into a new fund or funds for the long term. The plan is to use a portion of the money to guarantee that State investment can continue, even if growth slows – avoiding the mistakes made after the financial crash when investment was slashed. And some would be used for a longer-term fund to support the public finances and help pay for ageing and vital climate measures.

The political case to be made in the budget is that a lid is kept on spending increases and tax cuts now to help achieve these longer-term goals. Irish governments have always struggled to escape short-termism and the boom-to-bust cycle. Budget 2024 will be the acid test of whether the current administration can do better.