Ireland risks betting the farm on decisions made around a few water coolers in Silicon Valley

The publication this week of pre-budget figures in the Summer Economic Statement is only round one of a long battle about how to respond to the cost-of-living crisis. Get ready for a summer full of hints about what the Government might do – Ministers will face two ways at once, promising us that they are being careful with the public finances while simultaneously committing to offer help all over the place. Behind this battle is one unanswered question: how long will this inflationary surge last and how will things look this time next year?

Politically this is key, for the following reason. The Government coffers are overflowing with cash. For now. There will thus be a big push to spend money later this year on what will be presented as once-off measures. Take your pick from a special autumn bonus for all welfare recipients; another energy credit for all households on the lines of the €200 one paid earlier this year; more once off payments to the poorer households who qualify for the fuel allowance, and so on. There will be no end of other ideas coming forward, given the €4.2 billion surplus reported in the first half of this year.

Bar the energy credit, which wastes too much by giving cash to many households who don’t need it, a case can be made for all this. And clearly those on lower incomes need and must get help, given the massive surge in inflation. The political – and economic – problem is whether this help is really “once-off” or we will still be facing a higher inflation rate well into next year. Nobody knows, of course. But there are clear threats to gas supplies from Russia this winter, which could send prices sharply higher again. And it is hard to see inflation returning to the safe pastures of somewhere around 2 or 3 per cent any time soon.

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As the cost-of-living crisis continues, there will be big pressure to maintain higher spending next year. By early 2023, the pressure would be on again to repeat the ”temporary” measures of late 2022. Otherwise, the people who benefited from once-off supports this year would be worse off next year. If the inflation rate is still high, you can see the problem. Introducing big temporary measures again in 2023 would effectively make a nonsense out of the revised commitment to keep spending growth under 6.5 per cent next year. Forget Budget 2023 for now – the first battles will be about what extra money to spend this year.

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There is cash around. But the big issue is the extraordinary increase in Ireland’s reliance on corporation tax from a few big companies as a source of revenue. One euro in every eight of all tax revenues comes from corporation tax paid by just 10 firms, and together with their employees they also pay a fair chunk of income tax, USC, PRSI and VAT. The increase in corporation tax payments over the past year alone accounts for €3 billion of the €4.2 billion budget surplus for the first six months. Go back to pre-pandemic corporate tax levels and the annual deficit could be heading for €7 billion, all other things being equal.

This flood of cash gives Ireland valuable options. But heading into what could be some kind of global recession, Ireland is exposed to the profits and tax structures of, say, a dozen big US companies and to decisions made in their board rooms. The challenge of financial management is to use this money wisely without relying on it to prop up ongoing day-to-day commitments. Economically, there is a strong case to put some of it aside in a special fund, available perhaps to smooth out future economic shocks, or as a fund for special capital investment.

Politically, of course, the problem in planning a rainy-day fund is that the Opposition will argue that is it pouring already. And pressure from Sinn Féin in particular is effectively setting out the pitch on which a lot of today’s battles are being fought.

Trade-offs

Paschal Donohoe and Michael McGrath are, we presume, trying to get their colleagues to confront the trade-offs necessary in addressing a cost-of-living crisis which could be with us, in what we might call a crisis phase, for a few years. Tackling it requires two decisions – where and how to address resources and, crucially, what this means for tax levels and spending elsewhere.

Politicians have no problem coming up with ideas under the first heading, but will try to avoid addressing the implications tax and spending elsewhere. Helping people who need assistance – and may do so for some years – requires targeted measures and going easy on spending elsewhere. It comes at a time when the ageing population and climate change are already making the inevitable case for higher tax levels.

If the Government puts a whole range of new spending programmes in place on the basis that corporate tax revenues are a one-way bet – in the right direction – then they are betting the farm on decisions made around a few water coolers in Silicon Valley. And history shows how quickly the public finances can turn if a hit to growth is combined with a big fall-off in a key source of revenue, as happened during the financial crash when property-driven taxes collapsed.

The challenge for Irish politics is to try to respond to the cost-of-living crisis while removing the froth of corporation tax from the equation. Resisting calls to bring forward the budget to the summer just increases the pressure by the autumn. The risk for the Government is being seen to do too little now when there is plenty of cash around. This will cause rows in the Dáil in the months ahead but they will be nothing compared to the fights within Government about what to do.