Repairing the public finances requires drab and uneventful budgeting

Budget 2022: Pension and welfare increases reflect focus on cost of living

If you think of the dramatic budgets of the past – Charlie McCreevy’s decentralisation fiasco of 2003, Brian Cowen’s unsustainable giveaway in 2007, Brian Lenihan’s €6 billion clawback in 2011 – they either preceded a crisis or took place in one.

Lenihan was forced into two budgets in 2009 as he attempted to halt the slide in the public finances. Budgets are meant to be drab, boring affairs in which incremental tax changes are laid out alongside modest spending plans.

When journalists struggle to find a theme or Opposition parties appear neutralised in their criticism, that’s a good thing. It signals fiscal stability.

As a country, we’ve been slow to grasp this and slow to put the public finances on a stable footing as a result.

Farcical

The notion of budgetary winners and losers is also farcical and a throwback to the days when budgets were used as political tools to buy votes. Budgets are there to redistribute resources, to address anomalies not to confer an advantage on one group over another.

We’re still not fully across this new era of budgetary dullness, however. Flashes of the old school still persist. Announcing a €5 increase to pension and welfare payments – the centrepiece of Budget 2022’s cost of living measures – rather than just indexing them and making it easier for people to forecast and budget accordingly is one example.

Announcing surprise supplemental health budgets to cover overruns, as we’ve seen in recent times, is another. Leaving a decision on the Christmas bonus for welfare recipients to budget day every year also seems to be politicised – as in designed to paint the Government in a good light.

To assess whether Budget 2022 is a good or bad package of measures we need to answer two questions: do the numbers stack up? And is it relevant to the issues facing the economy?

The budget framed about a 5.5 per cent increase in spending, slightly larger than what the Irish Fiscal Advisory Council (Ifac) advises based on what it views as the medium-term growth potential of the Irish economy, which is 5 per cent. The package gives the Government a spending increase – in real money terms – of €4.2 billion, which is supplemented by tax cuts of €500 million for a budget-day package of €4.7 billion.

Demands

Minister for Finance Paschal Donohoe and Minister for Public Expenditure Michael McGrath have signalled this for several months and appear to have held the line against fierce demands for more spending, added to by a greatly reduced budget deficit. The deficit – the gap between tax revenue and spending – was expected to be about €20 billion this year but is now likely to be €13 billion courtesy of better-than-expected tax receipts and less spending on Covid supports, a positive swing of €7 billion.

And remember the €4.7 billion package is a massive climbdown on the €17.7 billion budget announced last year, the biggest on record. Budget 2022 also takes place in the absence of EU fiscal rules, they’re still suspended.

That makes Donohoe and McGrath fiscal hawks, at least in the context of Irish politics. In its pre-budget submission, Ifac said the increase was “at the limit of what is prudent” but green-lighted the Government’s package. That would suggest the numbers do at least stack up.

The trickier, more debatable point, is whether Budget 2022 is relevant. In other words does it address the State’s undeniable need in areas such as housing health and climate change.

Does it get the balance right between unwinding Covid supports and supporting vulnerable sectors? And will it ameliorate – at least in part – the current cost-of-living squeeze? The pension, welfare, minimum wage and fuel allowance hikes are attempts to address the latter, as is the indexing of tax credits and bands. According to consultancy EY, workers paying the top rate of tax will net an additional €415 a year from the changes. But with families expected to be paying €400 more for their electricity and heating this winter – and that’s before hikes in fuel, food and other items are factored in – those increases, particularly for those on the lower end of the income scale, look modest.

Spend

The additional spend and focus on housing – already flagged in the Government’s Housing for All strategy – is apparent (the housing budget next year will be €6 billion), but it’s not obvious that it will square the cost circle at the centre of the problem. And pouring additional money into a sector that’s already running close to capacity may just place further upward pressure on prices. Having two potentially inflationary help-to-buy schemes on the go at a time of rapidly rising house prices isn’t ideal either.

On health, the €1 billion increase is in line with the Government’s new 5 per cent spending rule but it has again failed to provide clear estimates of future increases over the medium term or an estimate of the likely cost of Sláintecare.

Whether the phasing out of pandemic supports will strike a balance between fiscal prudence and supporting the economy or be “disastrous”, as the Restaurants Association of Ireland claims, is impossible to tell at this stage. Supports will need to be fine-tuned as we go along, perhaps tailored specifically to firms in the worst-hit hospitality and entertainment sectors.

People will decry the minuscule gains dished out in Budget 2022, but if we want to address the big infrastructural problems facing the State while not overheating the economy, difficult trade-offs are required.

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