Something will have to give to put the State’s finances on a sustainable path

Scaling back big government spending as the economy recovers is going to be politically tricky

Minister for Finance Paschal Donohoe: he says he has been banging on about the high marginal tax rate for “middle-income workers” for years.  Photograph:  Julien Behal Photography

Minister for Finance Paschal Donohoe: he says he has been banging on about the high marginal tax rate for “middle-income workers” for years. Photograph: Julien Behal Photography

 

As an era of ultra-cheap money has made it easy for states to throw billions of euro at the Covid-19 crisis, scaling back big government as the economy recovers is going to be politically tricky.

Earlier this month the Economic and Social Research Institute (ESRI) argued that the State should borrow €4 billion to €7 billion a year “on an ongoing basis” to invest in housing if it is to avoid another decade of home shortages.

Over the weekend Tánaiste Leo Varadkar called for the €4 billion boost in health spending in this year’s budget to be permanently maintained.

Yet he also recently said the State’s high marginal personal tax rates – at 52 per cent – was a “major disincentive” when competing for highly mobile remote workers in a post-Covid world.

He has got a kindred spirit in Minister for Finance Paschal Donohoe, who told reporters on Monday at the launch of the National Treasury Management Agency’s (NTMA) annual report that he has been banging on about the high marginal rate for “middle-income workers” for years.

“If we see increased competition for mobile workers in the coming years, which we’re very likely to do, for all the reasons we know about, the issue of competitiveness on marginal taxation will become even more important,” he said.

But with the Exchequer already facing an expected hit in the coming years from planned global tax reforms, and the Department of Finance forecasting that government debt will rise to 115 per cent of the underlying economy – GNI* – by the end of this year from an already-high 95.6 per cent before the pandemic, something will have to give to put the State’s finances on a sustainable path after the crisis.

Not that Donohoe was in a mood on Monday to give any clarity just yet.

“In terms of how we will reconcile all of this, we will do this through the publication of the Summer Economic Statement, where we will outline what our views are regarding our national finances across the coming years,” was all he offered.

There was at least some good news for Donohoe and the Exchequer finances from the NTMA, with the cost of servicing the national debt reducing to €3.5 billion annually, less than half the €7.5 billion of interest the State was paying on borrowings at the post-crisis peak in 2014. And NTMA chief executive Conor O’Kelly expects our debt interest costs to remain stable in the period to 2025.

Every little helps.

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