Phasing out Covid spending will bring practical problems and fights in Cabinet

Big economic departments want spending to fall into line, but there is huge political pressure to spend, particularly on health and housing

  Michael McGrath:  he says winding down emergency spending “is fundamental to the task of bringing our national finances to a safe place over the period ahead”.  Photograph: Alan Betson

Michael McGrath: he says winding down emergency spending “is fundamental to the task of bringing our national finances to a safe place over the period ahead”. Photograph: Alan Betson

 

Normally the National Economic Dialogue (NED) takes place against the backdrop of detailed economic forecasts for the year that lies ahead. The uncertainties of the pandemic have upended planning this year – but so have tensions within Government over setting future targets for the public finances as the country emerges from the worse of the pandemic. And so the NED discussions take place this year without a clear analysis of what resources might be available on budget day.

In this context it is significant that Taoiseach Micheál Martin used his speech to the dialogue to underline the need to wind down the special Covid-19 spending “over the next year or so” – and for all sides to recognise the trade-offs that lie ahead for the public finances.

That the Finance and Public Spending Minsters, Paschal Donohoe and Michael McGrath, made the same case to the dialogue was no surprise – they have been doing the same now for some time. But the Taoiseach’s intervention suggests there is now an agreement to lay out some new targets for the public finances as part of the Summer Economic Statement, a mid-year document due to be published shortly.

This would make the trade-off explicit to ministerial colleagues in relation to emergency Covid-19 spending.

Total Government spending has shot up from an annual rate of €70 billion before the pandemic to €90 billion now. Keeping it at that level, McGrath pointed out, would mean either taking the risk of big deficits continuing or hiking taxes.

Donohoe said as the economy rebounded the country simply could not continue to run a sharply expansionary budget policy even if some sectors would still need ongoing support.

Demands

Phasing out the special Covid-19 spending will bring political and practical problems, It will also involve a string of fights in Cabinet – there are demands around the table that ongoing supports and spending are needed in many areas and that money should be reallocated to meet these. But winding down emergency spending , says McGrath,”is fundamental to the task of bringing our national finances to a safe place over the period ahead” .

The Government’s own analysis and that of the budget watchdog, the Irish Fiscal Advisory Council (IFAC), are that the State can afford to carry the increased national debt arising from the pandemic – heading for €250 billion – on the balance sheet. The money has been borrowed at exceptionally low interest rates and these are now locked in, at least until the money has to be refinanced.

However, there are a host of other spending pressures coming down the tracks – climate change, the ageing population, housing, Sláintecare and so on. Higher economic growth will, we hope, pay some of the bills, but IFAC warns other spending beyond that already planned will require higher taxes in the years ahead.

Much will depend on ECB policy. The ECB promised to continue supporting governments to borrow money until March – and not to pull the rug too quickly . The expectation is interest rates will stay low for quite some time in the wake of the pandemic, but as growth rebounds across the euro area, nobody really knows.

Budget rules

A Government document published on Monday reviewing financial emergency legislation warns there is more reason now to expect the “supportive policy environment” to change than to stay the same. This refers both to ECB rates and to EU budget rules, which are suspended until the end of next year.

Pressure is clearly being brought on the Cabinet from the two big economic departments to fall into line on spending. But there is huge political pressure to spend – particularly on health and housing.

This will run all the way to budget day.

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