Donohoe’s tough talk on pandemic borrowing diverts attention from real spending issue

Minister maybe falling into political trap of promising everything to everybody

Politics, like theatre, is about managing the audience’s attention and what Paschal Donohoe is diverting our attention from is the unprecedented pick-up in general spending... Photograph: Paul Faith/AFP

Politics, like theatre, is about managing the audience’s attention and what Paschal Donohoe is diverting our attention from is the unprecedented pick-up in general spending... Photograph: Paul Faith/AFP

 

Minister for Finance Paschal Donohoe is promising to eliminate “the high levels of borrowing” and emergency spending related to the pandemic within the time frame of two budgets.

He said it in an interview on RTÉ radio last week and again at an agribusiness event on Wednesday. It sounds like something significant is being undertaken, that a new fiscal rigour is being applied, but that’s not quite the case.

The emergency borrowing related to Covid (€34 billion to date) and the bulging budget deficit (€18 billion last year, €20 billion this year) stem, in the main, from three things: the pandemic unemployment payment (PUP); the employment wage subsidy scheme (EWSS); and the additional health spend associated with Covid.

Budget

The draw on the public purse from these three should, however, fall away as the pandemic recedes, presuming there is no repeat surge.

The Government has already signalled that the PUP will be wound down over the next few months and phased out entirely by February next year, while the EWSS is likely to follow a similar path. And the additional health budget tied into Covid is already much reduced.

So in many ways Donohoe is playing the old government trick of under-promising in order to overachieve. The emergency borrowing and spending associated with Covid, barring a disaster, will be mostly gone by this time next year. Some of it may linger into 2023 but Donohoe’s two-budget time frame gives him ample leeway.

But politics, like theatre, is about managing the audience’s attention and what Donohoe is diverting our attention from is the unprecedented pick-up in general spending – unrelated to the pandemic – that is occurring as we exit the current crisis.

This is likely to be flagged extensively by the Government’s fiscal watchdog – the Irish Fiscal Advisory Council – in its pre-budget statement next week.

The Government’s recent summer economic statement (SES) marked a sea change in the Coalition’s budgetary strategy. It envisages a sequence of bigger deficits out to 2025, culminating in a budget deficit of €7.4 billion in 2025, which is €6.6 billion more than the original target set out in the Government’s stability programme update, published in April.

It also envisages €18.8 billion in additional borrowing over five years. So while the Government is reining in pandemic spending, general spending is racing forward.

Demographics

The revised estimates in the SES are being driven by a significant ramp up in spending related to demographics on the current side and increased investment in housing and green infrastructure on the capital side. The SES also envisages a sequence of income-tax cuts.

So Donohoe is potentially falling into the political trap of promising everything to everybody: lower taxes, more spending and a reduced deficit (reduced from pandemic levels).

In fairness to the Minister, it’s a tricky dynamic to manage. If the fiscal hawks are criticising his spending moves, a large section of the population are clamouring for more public investment, particularly in areas like housing, which has now become public issue number one. He can’t please them both.

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