There is one thing for sure reading the Department of Finance’s Future Forty long-term outlook published this week.
More money is going to be needed to run the State in the years ahead.
Government spending will have to rise significantly as a share of the economy, as an ageing population requires healthcare, and pensions and bills are paid to fund climate change and massive infrastructural spending.
A significant hole is likely to open up in the public finances. The question is who is going to pay?
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The risk is that the bigger burden is likely to fall on those entering the jobs market now or in the coming years, who have a lifetime of income tax paying ahead of them. And this is the generation already suffering the worst of the housing crisis where, as the report points out, demand is likely to continue to outpace supply for years to come.
For now, the public finances are protected by the magic money tree of corporate tax. It may keep giving.
Recent filings show that big US companies like Microsoft and Apple are continuing to book huge profits from their international operations in Ireland – and thus they pay massive amounts of tax here.
A notable aspect of the Department of Finance’s forecast is that if this trend were to keep going, then the outlook for the public finances becomes a lot more favourable. The forecasts assume that Ireland continues to get a lot of the so-called windfall corporate tax until 2030 – in other words, the money that is paid here for tax planning reasons, rather than on the basis of real economic activity. It then assumes a fall-off in the windfall corporate taxes over the next decade to 2040.
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On this basis, the exchequer finances would move into deficit by 2033 – during the term of the next Government – and this gap between spending and revenue would grow significantly thereafter. But if the windfall element of corporate taxes continued to flow into the Irish coffers, the State might not go into deficit until the 2050s.
In that case, like this generation of workers, the next one would see its income tax burden held down by the large amounts being collected from big companies.
Happy days. But it does not look like something we should bank on. Policy action by Donald Trump – at a sectoral or company level – could still have an impact and another bumper tax take this year will renew focus on Ireland in Washington. And the exposure to decisions made in a small number of US boardrooms is growing all the time.
A fall-off in corporate tax is one of the biggest risks facing Ireland. A 40-year forecast ignores, by its nature, the ups and downs – the impact of “events”.
While the Department of Finance plots a straight line of gradual, if slowing, economic growth, Irish economic history more closely resembles a rollercoaster of ups and downs. A key policy challenge is to smooth these out, at least to some extent.
The financial crash hobbled many in what might be called the tracker mortgage generation. We can’t afford to have those following them and now struggling in the housing market hit hard by whatever iceberg appears next.
The danger to the younger generations is that this generation blows the benefits of the current boom in the public finances – and a relatively strong economic position. This would increase the risks if troubles hit and fail to lay proper investment foundations to underpin productivity in the future.
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The Department of Finance document suggests there is a 10-year window before the public finances turn decisively in the wrong direction. It could be more or less, but ensuring there is an enduring economic legacy should be seen as the big economic challenge of the day. Compare Ireland to other “older” European countries like France, Germany and the UK and you see a much more favourable position – and also a view of the pressures which will emerge here in the years ahead.
Long-termism is not easy in a populist world. Ireland is putting away about one third of the windfall corporate tax in two funds to help support future spending. The Fiscal Council and Central Bank say it should be more.
Minister of Finance Paschal Donohoe argues that this is not realistic at a time when the State had such a huge demand for additional investment. He has a point, though with two caveats. One is the obvious one; the investment must deliver. As the report says: “the housing shortfall is one which must be addressed as quickly as possible to avoid it spilling into later decades when economic and fiscal resources will dissipate.”
The second is that day-to-day spending is also sprinting ahead, and while part of this is catching up with an expanding population, the 40-year outlook raises important questions about improving service delivery in areas like health through better productivity. And it assumes much lower rates of overall spending growth in the long term than we have seen over the last few years.
As the Fiscal Council points out, on current spending trends, the public finances are at risk of tightening much more rapidly.
Thinking of the long term means focusing additional spending on areas which can boost productivity and also see off future threats – think developing skills and education, climate change action, preparing to mitigate climate damage, developing AI and digitisation, as well as the vital housing and infrastructure investment now being planned.
This - and putting money into the future funds - is delaying consumption now for future benefit. It is like households investing in education rather than going on holiday.
This kind of strategic thinking is the opposite of much of the shouty debates we see in the Dáil and in the media.
If the focus remains on spending all the money the State has to boost current living standards, then the cash boom and our favourable economic position will be wasted. The prospects for the younger generation will be hit. The key point is that, one way or another, the odds are rising that the public finances are going to get tighter and options will then narrow.
If we are lucky, the Department of Finance may be right that there is a decade of opportunity ahead. But we need to start acting as if we only have four or five years.
