Every self-respecting finance minister cultivates an image of prudence. Budgeting, making hard financial choices are part of the job spec. To signal otherwise would be politically ruinous. Former finance minister Charlie McCreevy’s “when I have it, I spend it” comment stands as an epitaph to Ireland’s boomtime folly.
Paschal Donohoe, who finishes the second of two terms as finance minister later this month, has built a reputation for competence, for being cool under pressure. His unflappable, always-on-message style has endeared him to policymakers in Europe. His re-election as president of the influential Eurogroup, while relinquishing the finance brief here, is testament to that.
But whether he deserves the moniker “Prudent Paschal” is a more challenging question to answer.
His first years as finance minister – he officially took over the portfolio in 2017 but was in command for the budget in 2016 as his predecessor, Michael Noonan, was sick – may have seemed, on the surface at least, financially calm, certainly not as eventful as what was to come.
The economy was growing strongly, unemployment had fallen and, in 2018, the government ran a budget surplus for the first time since before the financial crisis, a milestone in the context of the budgetary horror show that pertained after the crash.
Donohoe, however, was responsible for a major ramping-up of public spending and a sequence of budgetary overruns, most notably in health, which were papered over by windfall corporation tax receipts.
Planned spending on public projects, such as the national children’s hospital and the national broadband plan, ballooned. He also controversially signed off on an €81,000 pay rise for the State’s top civil servant, Robert Watt, bringing Watt’s salary to €292,000.
Watchdog rebuke
Donohoe might have talked a good game on prudence but for fiscal hawks he was giving in too easily to spending calls on multiple fronts, stimulating an economy that was already hot. At the time, the Irish Fiscal Advisory Council (Ifac), Ireland’s budgetary watchdog, rebuked the Department of Finance for “repeatedly” breaching its own targets; allowing public spending to advance at an unsustainable rate; and presenting unrealistic spending targets into the future.
Ifac’s then chairman, Seamus Coffey, said there were “worrying echoes” of the 2000s when a cyclical expansion in tax revenues had funded a significant increase in public spending.
For Donohoe, whose political career was forged in the aftershock of Fianna Fáil’s pre-crash administration, against a backdrop of financial controversies and withering austerity, that criticism must have stung.
He has always maintained that the pressing concerns of housing and health have necessitated trade-offs. At the time, Fine Gael colleagues were also pushing him hard to spend more in the run-up to the 2020 election. He resisted, a position that remains a sore point within the party.
Those criticisms aside, his tenure in charge of the public finances has coincided with the Republic’s return to fiscal health, which afforded the State an exceptional financial pathway through the defining crisis of his tenure in charge, Covid-19.
Managing Covid
The financial firepower deployed to meet the challenge of the pandemic – in excess of €28 billion over two years, used in the main to fund the Pandemic Unemployment Payment (apparently developed and announced within three days at the height of the crisis) and the wage subsidy schemes – was unprecedented.
By effectively nationalising a large segment of the private-sector wage bill, the Government cushioned the economy from the worst of the fallout, allowing it bounce back to near full employment in a relatively short period of time and without the scarring effects that many had predicted.
Tax receipts, not just corporation tax but also income tax and VAT, have surged back to record levels since, giving the Government more financial leeway to deal with the current inflationary squeeze. Its recent €11 billion cost-of-living budget was the biggest outside of the Covid era.
By channelling a lot of the money into temporary measures that can be unwound without permanently raising costs to the Government, and by trying to limit the inflationary consequences of the budget spend, Donohoe has this time won Ifac’s backing.
Current Ifac chairman Sebastian Barnes said the budget struck a difficult balance between helping people and not being too inflationary.
One of the ironies of the finance brief is that it is perhaps an easier seat in a crisis, where you are praised for spending big and when interdepartmental wrangling can be rejected for a higher cause. In times of relative stability when spending must to be reined in but when everybody feels they should be getting more, the ability to resist becomes more difficult.
The experience of Covid appears to have compounded Donohoe’s belief that the public finances need to be managed as a bulwark against future crises and not held hostage by the political vagaries of the day. He introduced a 5 per cent spending rule last year, designed to keep spending on a sustainable footing, something to which the Government has more or less stuck.
However, an issue that continues to dog his department is the lack of financial planning. Even now, its forward budgeting stretches only three years into the future and seemingly ignores the cost of age-related spending and the green transition, both of which are expected to accelerate in the coming decade.
Two commissions set up to address the vexed question of Ireland’s future financial needs, on tax and pensions, have both been ignored. In the case of the former, you might say, it was killed at birth. Tánaiste Leo Varadkar claimed it read like a Sinn Féin manifesto.
Ireland’s future financial planning remains a live question, something the Government seems content to kick down the road.
Moderating influence
In his first budget speech, Donohoe insisted the defining challenge of the era was whether the political “centre would hold” in the face of the rising tide of populism and the polarisation of politics globally. Not that his party is part of this populist wave but the Minister does act as a sort of speed bump to some of the more politically motivated gambits of his colleagues, pushing back on Varadkar’s proposal for a new third rate of income tax, for instance.
Donohoe is a centrist by nature, a believer in incremental change, a follower of orthodoxy. He frequently sides with the mandarins in his department over his political colleagues. This has led Fine Gael backbenchers to accuse him of being politically tone deaf. His geniality should not be mistaken for weakness, however. According to insiders, he was one of the angriest voices in the room during the Government’s increasingly tense meetings with Nphet (the National Public Health Emergency Team) at the height of the Covid crisis.
Global tax reform
Since he took over the finance portfolio, Ireland has been in the eye of a global storm on tax, regularly branded as a tax haven and a patsy for big business on account of its low-tax regime. US Nobel Prize-winning economist Joseph Stiglitz accused Ireland of “robbing” from its European neighbours by allowing Apple and others pay such a low effective rate.
While the State’s reputation took a battering politically, insiders say the constant reference to Ireland’s low-tax regime caught the attention of corporate chief financial officers and may have had the effect of enticing more business here.
Donohoe pushed for reform – a seeming inevitability given the outcry over multinational tax avoidance – under the auspices of the OECD’s base erosion and profit-shifting (BEPS) agenda, which promised a reasonable compromise, while opposing more controversial proposals coming out of Brussels, such as a digital sales tax.
He successfully argued that small countries “need to be able to use tax policy as a legitimate lever to compensate for advantages of scale, location, resources, industrial heritage and the real, material and persistent advantage enjoyed by larger countries”. He also cultivated a strong relationship with US treasury secretary Janet Yellen throughout the process.
And while relations with Washington and Brussels were at times strained, the Government’s least worst option (a global minimum tax rate of 15 per cent, only marginally above the State’s existing 12.5 per cent rate) was eventually agreed, though it has yet to be adopted. In the circumstances, it will go down as a major victory for Ireland.
The concentration risk at the heart of the State’s corporate tax base, with just 10 firms providing over 50 per cent of receipts, and what to do with the excess revenue remain pressing issues. Putting €6 billion aside, €2 billion this year and €4 billion next, into the latest rainy day fund is a start but much of windfall to date has disappeared into the budgetary ether.
Bankers’ pay
Donohoe’s last major policy move as finance minister was to partially reintroduce bankers’ bonuses and gradually lift a €500,000 executive pay cap across bailed-out banks, a thorny political issue for obvious reasons. While it avoided handing his successor, Michael McGrath, a hospital pass, it has angered Fine Gael backbenchers who fear the electoral fallout.
Sinn Féin’s Pearse Doherty sarcastically described it as Donohoe’s “parting gift” to bankers. The truth is that Donohoe moved grindingly slow on the issue, sitting on a report advocating the move for three years before partially implementing the recommendations on his way out the door.
Perhaps a bigger criticism is that it took Donohoe four years to publish draft laws called for by the Central Bank in 2018 to make it easier for the regulator to hold senior finance sector executives to account for failings on their watch. The so-called Central Bank (Individual Accountability) Bill is currently winding its way through the Oireachtas, but it will be the second half of next year before the regime is up and running.
He also missed an opportunity to strike while the iron was hot when the Government sold a 29 per cent stake in AIB in mid-2017. The shares started to fall in late 2018 as global equity markets wobbled and would be further hit during the Covid-19 crisis. While Donohoe has been selling shares into a rising market for Irish bank stocks this year, the stock remains at a deep discount to its €4.40 initial public offering (IPO) price.
Leading the Eurogroup
The Dublin Central TD has been praised for his assured performance as Eurogroup president, which probably explains why Ireland is being afforded the unusual position of having two seats at the table. His re-election is also a coup for the Government as it maintains Ireland’s influence at the very top echelons of the EU.
The European Commission has forecast that the EU will tip into recession this winter before a low level of growth resumes next year while the decline in inflation, if and when it finally comes, is expected to be – in the words of one senior official – “very, very gradual”.
Combined with the increasingly uncertain fallout from Ukraine, the unpredictable trajectory of energy prices and the possibility that rising interest rates could trigger another sovereign debt crisis, Donohoe’s stewardship of the Eurogroup remains a formidable task.
His even-tempered style, forged against a backdrop of near continual crises – Brexit, Covid-19, war, inflation – makes him, in the eyes of his European colleagues, the perfect man for the job.
