The budget each year is about giving context to the Government’s economic policies, as well as laying out specific policy measures. As we hope to leave the worst of the pandemic behind, this presents some difficult challenges. There are choices to be made – even if no one in Government or Opposition wants to face them head-on.
The Irish Fiscal Advisory Council (IFAC), in its pre-budget assessment, sets out the key issues. It says that the Government's Budget 2022 plans are "at the limit of what is prudent" and warns that in the years ahead moves to increase day-to-day spending, invest more and cut taxes are unlikely to all be affordable. In other words, the Government needs to choose its priorities – and look for higher revenues to offset plans for ongoing spending increases.
Few of these trade-offs have been addressed by the political parties in their annual think-ins, which appear to be little more than PR opportunities. All parties are in favour of higher investment in areas such as housing, there is pressure to increase spending in a range of areas, including health and welfare and talk, too, of tax cuts.
The IFAC document is not so much critical of what may be in the October budget – some areas of the economy are still ailing and need support and many people remain out of work and this will push up spending. But it raises questions about the longer-term context. How exactly will the Government’s new plans to restrict spending work? How will resources be raised to pay for all the bills we face and how can we be as sure as possible the public finances will be on a sustainable path?
Much will depend on the growth pattern of the international and Irish economies after the unprecedented Covid-19 shock. And so there is a lot of uncertainty. The IFAC reckons growth might be a bit stronger than the Department of Finance has forecast, but still cautions that there is a one in four chance of the public finances ending up on an unsustainable path. And that would likely mean emergency spending cuts or tax increases.
One key advantage is that Government borrowing costs are likely to remain low – though retaining the confidence of lenders will be vital as ECB support is gradually reduced. But a constraint for Ireland is that our existing debt level is high. And the country also faces the uncertainties of international corporate tax reform, which could deliver a blow to investment and corporate taxes in the years ahead.
Parts of the economy – and many citizens – continue to need support. And it makes sense to invest in key areas like housing and climate change, though it is vital that the money is well spent. But the IFAC and other commentators are correct when they point out that choices lie ahead. It is not possible to do everything.