Will ESRI’s call for prudent budget be heeded?

Cantillon: Government pledges caution with public finances amid calls for more spending

Minister for Finance Paschal Donohoe: cannot claim he has no cash  and so raising new revenues is a politically fraught exercise. Photograph Nick Bradshaw

Minister for Finance Paschal Donohoe: cannot claim he has no cash and so raising new revenues is a politically fraught exercise. Photograph Nick Bradshaw

 

The Government is talking a good game on the budget and the prudence message will be sold hard in Tuesday’s Summer Economic Statement, which will provide a few clues to the direction of budget policy. It will state explicitly that the Government does not plan to use all the room for manoeuvre it would have under EU rules in the 2019 package, which would be in tune with the advice in the Economic and Social Research Institute’s latest quarterly economic commentary.

However, remember that the Government has already committed some €2.6 billion in extra spending next year, much of it directed to increasing investment levels. The question now is how far it will go beyond this in increasing spend. It is likely to have more than €1 billion in additional leeway, while still keeping to EU rules, but says it does not plan to not use all of this.

Investment in key infrastructure is urgently needed, particularly given the housing shortage. The ESRI’s message it that when this is taken into account, it would not be wise to also cut taxes and further increase demand.

Politically fraught

With the economy growing quickly, the ESRI argues there is no case right now for cutting the overall tax burden. This means if the Government wants to give tax relief in some areas, then it should raise new revenues elsewhere. The trouble is that raising new revenues is a politically fraught exercise, particularly when Minister for Finance Paschal Donohoe cannot claim he has no cash and, indeed, is allocating funds to a new rainy day fund.

The Summer Economic Statement will play the prudence card, promising to reduce borrowing, cut the debt burden and prepare the economy in case growth slows. But can the Government deliver? The rate of reduction in State borrowing has slowed sharply in recent years, as spending levels have started to rise.

The ESRI’s advice is simple. The Government should stick with the new investment plan, but hold back elsewhere. With many calls on the budget pot, this will be easier said than done.

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