Big decisions soon about the post-Covid trajectory of the public finances

A number of long-term spending proposals are raising eyebrows in the Department of Finance and the Irish Fiscal Advisory Council

Any money that was needed for dealing with Covid was borrowed and made available. That phase is now coming to an end. Image: iStock

Any money that was needed for dealing with Covid was borrowed and made available. That phase is now coming to an end. Image: iStock

 

The Government’s Summer Economic Statement, a key part of the budgetary process, is expected in the coming weeks.

But when? Nobody in Government seems sure. Next week, says one person involved in the process. No, not next week, says another. Maybe the week after. Other sources shrug: yeah, where is that?

The three party leaders and the Finance and Public Expenditure Ministers were due to meet to discuss the relevant issues on Monday night, it is understood. That will kickstart a series of meetings over the next week or 10 days which will see fundamental decisions made about the post-pandemic trajectory of the public finances.

A key decision will be whether the leaders of the Government decide to tether the public finances to spending and deficit targets for next year. Since Covid struck last year, the Government – in common with most western countries that could afford it – effectively suspended normal budgetary controls. The EU put its fiscal rules, legally-binding on Ireland, remember, into abeyance under emergency provisions. Any money that was needed for dealing with Covid was borrowed and made available.

That phase is now coming to an end. As the vaccination programme rolls out, society is reopening and the pandemic is passing. Few people inside or outside Government are complacent about the potential danger from new variants of the virus, but they have begun to plan for the future.

That means planning for how much the State should spend, and how it should be paid for. This is the normal business of government: spending and deficit targets are agreed at the centre of government and enforced by the Department of Finance and the Department of Public Expenditure.

The two Ministers say no most of the time, because the great bulk of other departments’ spending budgets are committed in advance, and the amount of discretionary spending is limited.But that paradigm has been disrupted in the past year. The decision for the leadership of the Government now is whether to restore it, and if so how quickly?

Spending pledges

In recent weeks the Government has made a number of long-term spending pledges, including over €3 billion in its pandemic recovery plan. Even as that was being launched, Ministers and the Taoiseach were talking about a “welfare package” in the Budget – a euphemism for increases in pensions, unemployment benefit and other payments – while Tánaiste Leo Varadkar suggested that a “tax package” would also be necessary.

Varadkar followed up with a suggestion that income tax was too high, and then used his ardfheis speech to his party to advocate that the extra Covid spending should be retained in the Department of Health next year.

Eyebrows at this outbreak of latter stage Bertie-ism were raised in his own party, in the Department of Finance and also at the State’s budgetary watchdog, the Irish Fiscal Advisory Council.

“The big question for politicians is to explain how they would afford that,” Ifac’s head Prof Sebastian Barnes said on Monday.

Asked about Varadkar’s spending plans, he said, “We need to have a plan explaining how we’re going to pay for that.”

Similar questions are being asked in private.

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