Michael McGrath: ‘We will inevitably have a larger State coming out of the pandemic’

Minister warns ECB support will not last forever and says ruling out tax rises would be foolish

 Minister for Public Expenditure and Reform Michael McGrath says Government ‘relations are strong, and they will need to be, because we face huge challenges in the period ahead’. Photograph: Dara Mac Dónaill

Minister for Public Expenditure and Reform Michael McGrath says Government ‘relations are strong, and they will need to be, because we face huge challenges in the period ahead’. Photograph: Dara Mac Dónaill

 

The last Fianna Fáil minister to occupy a major financial brief looms large for Minister for Public Expenditure and Reform, Michael McGrath – literally and metaphorically.

McGrath says observing the former minister for finance, whose picture hangs in his office, was a formative experience for him as a young backbencher.

“I saw up close the impact of the economic collapse on our country, on members of the public, but also the strain that it imposed on members of Government, including people like Brian Lenihan, who was a big influence on my career.”

Although this current Coalition of Fianna Fáil, Fine Gael and the Greens has been pockmarked by confidence-undermining crises, McGrath argues this has fostered a common sense of resolve.

“In a strange way, when you face adversity, it brings people together,” he says, speaking of the “chemistry” between the three leaders of the Coalition parties. “My sense is that there is a real determination there to make this work,” he says. “Relations are strong, and they will need to be, because we face huge challenges in the period ahead.”

Less charitably, it could seem that the Government has decided that its constituent parts must hang together, or they will hang separately. But it does seem to have developed a calloused exterior when it comes to dealing with political crises.

A key difference between the governments McGrath and Lenihan served in is the prevailing economic climate. Lenihan’s budgets were trammelled by the dogmas of austerity politics. Meanwhile, McGrath and Paschal Donohoe last month unveiled the most expansionary budget in the history of the State, a process which saw both men praised from all sides of the Coalition – perhaps somewhat unsurprising when the spending taps are on.

What binds the two eras together is the sense that a generational crisis is facing the State, along with the pressure that brings to get the tight calls right. McGrath is “of course” worried about the public finances, but “that is matched with a determination to get this right and to do all that we can to support the economy, to minimise the damage and to give ourselves the best prospect of recovery”.

We’re certainly not saying that there won’t be revenue-raising measures in the Government’s lifetime, because I think it is inevitable there will be some

In an era of unparalleled State support for the economy, the bill is mounting. National debt will be about €220 billion by the end of next year, while the deficit this year will be more than six per cent. The State’s borrowing costs are currently at record lows, but McGrath says exceptional support from the European Central Bank will not last forever. “There will come a time, perhaps as early as later next year, when our borrowing costs will be fully determined by the attitude of investors on the markets.”

Against this must be balanced long-term changes arising from the pandemic, which bring their own spending pressures. “I think we will inevitably have a larger state coming out of the pandemic,” McGrath says. While some interventions have been temporary, “we have also made decisions that will result in a permanently larger public service”.

“That will need to be paid for within an overall framework that is responsible and sustainable,” he says. Next April, the Government’s Stability Programme Update will put a framework on this, while the National Economic Plan will map out a new model for the economy in the coming weeks. But McGrath is clear that new spending must not be built on borrowing or unsustainable sources of income.

That narrows the options for the exchequer, and while there is no current plan for tax increases, McGrath says: “We have to keep our options open. We’re certainly not saying that there won’t be revenue-raising measures in the Government’s lifetime, because I think it is inevitable there will be some.”

McGrath’s department is preparing for the prospect of talks about a new public pay deal, which must be signed off before the end of the year

While carbon tax increases are a function of policy that is written in stone, “in other cases, it would be a reflection of the fact that we are placing a priority on the provision of good public services, and that’s something that I strongly believe in”.

At each coming budget, he says, “both on the expenditure side, and on the revenue-raising side, it would be foolish to rule things out”.

Away from the pandemic, McGrath’s department is preparing for the prospect of substantive talks about a new public pay deal, which must be signed off before the end of the year. With significant developments expected in the coming weeks, he says he wants a deal that recognises both the worth of the public service and budgetary realities. “We’re in a very challenging situation and these could be difficult negotiations, but I think for both sides there is real value in having the stability and certainty of a public pay deal.”

The odds of significant industrial action in the public sector are also shortening, although McGrath seems uninterested in threatening to dock pay if public health doctors or teachers hit the picket line. “I have no plans whatsoever to do so and nor has the issue arisen in my time here so far.”