Cliff Taylor: Government is losing control of budget narrative

Pandemic bonus row just the latest sign of pressure to carry on spending

‘Focus on boosting investment in housing and the green agenda and helping the sectors still caught by the pandemic. Help those most in need . . . And that is it for now.’ Photograph: Alan Betson

‘Focus on boosting investment in housing and the green agenda and helping the sectors still caught by the pandemic. Help those most in need . . . And that is it for now.’ Photograph: Alan Betson

 

The Government is losing control of the budget narrative. It has forgotten that you just can’t please all the people all the time. A few weeks out from budget day we have promises of big spending rises, tax cuts and post-pandemic bonuses for much of the public sector which may include holidays, wage increases or better sick pay and entitlements, depending on what Minister you listen to.

Consider this alongside the other main economic news of this week – the building drum beats on corporate tax reform. This will directly affect the fortunes of the big foreign multinational companies which, together with their employees, are responsible for about one euro in every three of tax revenue collected. Now that’s a risk factor.

Ministers have responded to the latest row about a pandemic bonus clumsily – and you would wonder what the trade unions are up to as well. Better surely to try to tie in some long-term improvements in pay, conditions and entitlements than go for a few extra days’ leave.

You could not begrudge some recognition to those on the healthcare frontline, whether in terms of days off or a cash payment. But there is no case to spread this to the wider public service or to plan some kind of general post-pandemic gratuity. As one observer put it, imagine the optics of chasing people off the pandemic unemployment payment on one side while, on the other, giving extra days off or bonuses to people who worked from home during the pandemic. And remember that tens of thousands remain without work and with prospects upended in the sectors worst affected. The Taoiseach wants retail workers included – but many of their employers are hanging on by a thread.

Tánaiste Leo Varadkar put his own spin on it when he said that the outcome of the pandemic should be improvements in areas such as sick-pay entitlements, pensions and measures to address lower pay. These, however, would have to be paid for, presumably, by higher PRSI payments. These had been on the Government’s agenda before the pandemic, but you would think this was a better way to proceed than thinking up an excuse for another bank holiday.

Uncertainties

For the two budget Ministers – Paschal Donohoe and Micheál McGrath – a battle lies ahead. Borrowing costs remain low. With Sinn Féin making hay in the polls, the pressure is on from other Ministers to carry on spending. But while the short-term outlook is fine, or as fine as it can be with a deficit heading for €20 billion and a national debt heading for €250 billion, there are real uncertainties ahead.

One is how the world economy comes out of the pandemic – there has been an initial bounce, but nobody really has a clue what happens next. Tremors in the property market are causing markets to wobble. Gummed-up supply chains and commodity price increases are pushing up the rate of inflation.

Central banks cross their fingers behind their backs and assure us that this is temporary. It may be, but we just don’t know and they don’t either and this has big implications for interest rates.

The second uncertainty is how the pandemic – we hope – fizzles out here and what this means for the domestic economy. The latest employment figures show the split in Ireland’s dual economy is widening fast – industry is booming but sectors such as accommodation and food are spluttering.

And then there is the elephant in the room for Ireland – corporation tax. Between 2014 and 2019 – the year before the pandemic – overall Government spending rose by about €13.5 billion. A €6.3 billion rise in corporation tax occurred over the same period. Without the big rise in corporation tax, the budgets would have looked very different.

Uniquely vulnerable

The future health on this golden-egg-laying goose remains uncertain. But it is is a nailed-on certainty, if a deal is done, that there will be a new way for multinationals to pay tax, which the Department of Finance has estimated will cost Ireland up to €2 billion per annum. And there is the much more significant factor of the impact on future investment here of the potential change to the corporate tax rate and how the rules are set. We are uniquely vulnerable to decisions in a few dozen US boardrooms about where they book their profits and locate their factories and offices.

Half of all corporate tax is paid by 10 of the biggest players. And the total group of foreign multinationals here accounts for more than €8.5 billion in corporate tax revenue – more than 80 per cent of the total – and together with their employees account for a further €10.5 billion in income tax, PRSI and the USC. Not far off a third of all taxes is directly generated directly by foreign multinational activity.

This is already an expansionary package before the two Ministers even stand up, with significant extra spending pencilled in. Because of this, budget day would be a better if it was a bit of a non-event. Pick a few priorities. Focus on boosting investment in housing and the green agenda and helping the sectors still caught by the pandemic. Help those most in need – for example, those threatened by fuel prices rises. And that is it for now.

None of the economic dangers will hit this year – growth will remain strong, interest rates will stay low and the corporate tax cash will keep rolling in. Perhaps we will be lucky and growth will hold in, interest rates will stay low and whatever corporate tax deal emerges will not hit too hard. Perhaps, but we just don’t know. And we have seen, previously, the risks of rolling the dice and pushing our luck too far.

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