Budget must not make inflation pressures worse - Varadkar

Fiscal council warns against using corporate tax for permanent spending hikes

Tánaiste Leo Varadkar has warned that any support measures in Budget 2023 will have to be targeted to ensure that “we don’t make the situation worse”.

The Government on Monday confirmed it is to deliver a much bigger and earlier budget than planned with a series of one-off measures to tackle the cost of living crisis.

Budget 2023, which is to be delivered two weeks earlier than scheduled on September 27th, is to involve a €6.7 billion package of spending and tax measures to be announced on the day – an increase of €1.7 billion over previous plans.

“We don’t want to get into an inflationary spiral” Mr Varadkar told Newstalk’s Pat Kenny show. The budget will be able to introduce some immediate measures with others to come in January as this was a dynamic situation, he explained.

Every inflation crisis was different, in this situation the amount of money leaving the country was of concern, he said. Large sums were being “sucked out” to pay for oil and gas and the rise in interest rates also meant that more money was being taken out of the economy, Mr Varadkar warned.

As the situation changed, the Government needed to respond to it, which was why the five per cent rule was being overruled so that the vulnerable could be supported. “We have to respond to the dynamic situation just like we did with Brexit and the pandemic,” he said.

Mr Varadkar pointed out that one in four tax intakes come from mostly large companies which was proof that low taxes bring in revenue. However, some of the money generated through corporate tax would have to be put aside, but only if there was a surplus. It did not make sense to put money away if the country needed to borrow money, he said.

In response to criticism from the Opposition about how the cake was being divided up, Mr Varadkar said there was never any discussion about how the cake was baked, “it’s all about how to divide it” and Sinn Féin policies would mean less money for housing. They were opposed to a trade deal with Canada and would expect the executives of large corporations to pay higher taxes, if that happened then those companies could go to other countries, he said.

The Irish Fiscal Advisory Council (IFAC) has said strong corporation taxes “should not be relied on to fund permanent spending increases”.

The budgetary watchdog posted a series of tweets following the publication of the Summer Economic Statement . IFAC said Budget 2023 “involves a delicate balancing act in protecting the economy and poorer households, while avoiding adding to inflation through second-round effects”.

It said that “overreliance on corporation tax should be reduced through contributions to the Rainy Day Fund or a new pension reserve fund” and it warned that “uncertainty about the economy remains very high”.

On Tuesday the chairman of IFAC, Sebastian Barnes said the Government has managed to strike a reasonable balance in the Summer Economic Statement between supporting the economy and helping the most vulnerable.

However, Mr Barnes cautioned that most of the Government spending so far had not been targeted. The balance could be better and it was important that the budget be more targeted.

Long term issues such as the over-reliance on corporation tax needed to be addressed at some stage, he said.

Spending next year will increase by 6.5 per cent, which breaches the Government’s own spending rule of five per cent. The spending rule was good, Mr Barnes told RTÉ radio’s Morning Ireland, but these were circumstantial circumstances, so it did not make sense to stick to the 5 per cent rule.

The planned spend of 6.5 per cent “is a long way from chasing inflation at 9 per cent” he said. Overheating the economy was a risk with pressure on rents and global factors, said Mr Barnes.

Speaking on Tuesday Minister for Finance said he is very aware of the challenges facing people with the increased cost of living and will be implementing measures in Budget 2023 to address those challenges.

Paschal Donohoe said the Government’s aim was to get the balance right between supporting people and helping the economy grow.

Speaking on both RTÉ radio’s Morning Ireland and Newstalk Breakfast, Mr Donohoe said there were two things the Government was aiming to deliver – measures to help the economy to grow, which was vital for jobs, and to make the best use of additional resources “to give as much help as we can”.

However, he cautioned there needed to be recognition “we can’t do everything at the same time”.

Budget 2023 will have to include a mix of measures to combat increases in the cost of living, he acknowledged. Targeted measures run the risk of excluding some, he warned, such as working people who were outside social welfare supports.

While increased corporation tax meant there were more resources available, caution was also required because a change in even one multinational could have a huge impact, explained Mr Donohoe.

One euro in every €8 in the country was generated by 10 companies who now provided the second largest tax take in the country. This could change very quickly at any time so the Government could not commit to measures funded by Corporate Tax, even for one off measures. “One company making a decision could have an impact on thousands of millions. We’re doing our best to manage it”.

Mr Donohoe declined to outline specific measures, he said such decisions needed to be approved by Government and were still being discussed.

He acknowledged families would face difficulties when their children were returning to school and said that consideration would be given to the possibility of additional help.