Budgets err slightly on the side of expediency over prudence

In economic terms, the annual budget-cum-estimates play several roles. The first is to target a level of overall demand that results in the economy functioning at its capacity, not above it (driving inflation), or below it (leading to unemployment). Secondly, the budget influences the distribution of resources within the economy. The State’s capacity to borrow at acceptable interest rates is another consideration.

In political terms, budget decisions on spending and tax may win or lose votes. Finding a balance in budgetary policy between the economic and the political roles is the key challenge for ministers.

Overall, the package presented this week resisted the “if I have it, I spend it” approach which preceded the 2008 crash, with new funds established to make us more resilient in the face of future shocks. Obviously, it would have been less inflationary, but politically unpopular, to have provided for higher public savings through raising additional taxation.

The economic stimulus to the economy provided by the budget, of about 0.5 per cent of national income, will help prolong inflation, rather than raising national income per head

The economy has been at full employment since last year and seems likely to remain there next year. Prior to the budget, our incomes were already likely to rise faster than prices in 2024, leaving us slightly better off.

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Under these circumstances, the economic stimulus to the economy provided by the budget, of about 0.5 per cent of national income, will help prolong inflation, rather than raising national income per head. However, the fiscal stimulus is much lower than the 1.5 per cent of national income pumped into the economy last year.

The reduction in taxes on incomes will just about keep up with inflation, so that the average tax take next year will change little. While the carbon tax is increased as planned, keeping excise taxes on fossil fuels at reduced rates sends the wrong signal to motorists.

There is limited additional spending on public services, spread across a wide range of areas, generally aimed at reducing living costs, not on expanding public services for a rapidly growing population.

Social welfare payment rates will increase by a bit more than inflation, making up for some lost ground this year. However, it is a poor use of money to provide €450 in electricity credits to all households, at a cost of €900 million. It would have been much better to have used the money to target those worst off.

For example, a recent ESRI report showed how a second-tier payment to children in the poorest families, costing €700 million, could dramatically reduce child poverty.

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The lack of infrastructure, especially housing, is a key constraint on the economy. Rightly, the budget provides for a major increase in public investment, particularly in homes. However, funding alone won’t tackle the infrastructure deficit. We need to reform the regulatory system which creates uncertainty and delays, adding to costs.

Ireland also needs to reallocate its production capacity to make this increased investment possible. This means switching resources of labour and other inputs away from other economic sectors.

The budget, on its own, does not tackle either of these issues. We therefore run the risk that despite all the extra monies on offer, the development of infrastructure on the scale we need will be stalemated.

From its low point in 2012 following the economic crash, the resurgence and growth of the Irish economy has been striking. The multinational sector has boomed. Between 2013 and 2021, their share of national output rose from 22 per cent of the economy to 29 per cent, after adjusting for the outflow of their after-tax profits. By 2021, these firms accounted for a third of the economy-wide wage bill.

It’s obviously a delicate task to balance a continuing strong role for multinationals in Ireland’s economy with persuading them to cool it a little

Most of the growth in the output of these firms has been destined for export markets and their exceptional performance has seen Ireland accumulate a very large surplus on the current account of the balance of payments.

To date, this rapid growth has benefited us all. However, given the infrastructure deficit we currently have, further growth in the multinationals’ share of the economy is likely to be problematic. We can’t solve our infrastructure problems by importing houses or water mains from abroad; we need to build them here.

That means that across the economy we ought to reallocate some of the resources and skilled labour, that are making valuable exports, towards the vital task of building the new infrastructure we need.

It’s obviously a delicate task to balance a continuing strong role for multinationals in Ireland’s economy with persuading them to cool it a little, so we can redeploy skilled resources elsewhere.

As blended working leads to an emerging glut of office space, and a slowdown in new building in that sector, this may also free up essential construction skills for other much-needed infrastructure development.