How are we going to pay for the Irish big state utopia?

Raising money is almost entirely absent from debate on government formation

The nine scariest words in the English language, former US president Ronald Reagan declared in 1986, were: "I'm from the government and I'm here to help." It was the era when small government was fashionable, Margaret Thatcher was taking on the trade unions and "rolling back the state" in the UK, and Reagan was championing low growth in government spending, tax cuts and less regulation of business.

In 2000, Mary Harney, then enterprise minister, famously declared that Ireland was closer in spirit to Boston than Berlin – more an enterprise economy than one close to the continental social democracies. You might observe that Ireland tried to have the best of both worlds in the years immediately afterwards, cutting regulation and taxes and hiking spending. We ran out of road in 2008.

Now the economy has hit another roadblock – a big one. And the crisis is set to accelerate a trend which was happening anyway, the move to a bigger State. A central feature of the general election campaign was the call for more State intervention in areas such as health and housing. The coronavirus crisis has underlined the central role of healthcare and the importance of State support for people in trouble due to a sudden loss of income or a job. We seem to be heading due east to Berlin.

There is an obvious point, of course. Countries with bigger states have to pay for them through higher taxation. Yet this is a point as yet almost entirely absent from the debate on the formation of the next government. The parties have also yet to engage with the really tough decisions which lie ahead in dealing with the crisis and its immediate aftermath. The debate is looking three years hence – but the urgent issues are right in front of us. For now it’s not about change, it’s about survival.


It's like planning to put in a new kitchen and do up the garden when there is a risk of the house burning down

So far Fine Gael and Fianna Fáil have produced a framework document of aspirations which ruled in more spending in health, housing, education, childcare and social supports and ruled out higher income tax or USC or any cuts in core welfare rates. The Green Party's 17 demands submitted ahead of talks had nine that cost money and none that raised any, bar calling for lower spending on roads to pay for more on public transport and cycling.

There is a need for a reality check. Just look at the Department of Finance forecasts that borrowing is likely to rise to 7.4 per cent of GDP this year and could go to 10 per cent. It's like planning to put in a new kitchen and do up the garden when there is a risk of the house burning down. The work of the next few years will be putting out the fire and fixing the damage.

As Minister for Finance Paschal Donohoe said at a Geary Institute seminar on Friday, at some point a budget constraint will re-emerge – in other words we can borrow very cheaply to spend more now, but at some stage the cost of borrowing could rise, potentially quite suddenly and significantly. Ireland needs to stay "on the right" side of this constraint, Donohoe said. If the financial markets start to charge some countries a lot more to borrow because they fear their solvency, then we do not want to be in that group. This is a central consideration for the next government and will frame all its early economic decisions.

We have no choice but to continue to spend big now – and it is not the time to hold back or hike taxes. But that’s the emergency bit. What is being focused on in the excruciatingly slow government formation talks – you wouldn’t even call it a slow bicycle race as they would all have fallen off – is spending even more beyond this. It is a longer-term programme to expand the role of the State. And this will have to be paid for.

But where will the money come from? The Fianna Fáil/Fine Gael framework programme unwisely ruled out income tax or USC hikes. There should be no consideration of this now, but it wasn’t clever to rule it out for the period of the government.

It is noticeable that no such commitment was made on PRSI. A new social contract, more benefits such as childcare and income supports for people losing jobs or going on short-time, could be partly paid for by this. I think there is a strong chance that the next programme may signal higher employers’ PRSI as one option. Continental employers pay more, in return for bigger benefits for their staff. But the risk now is that this is a tax on jobs at a time when unemployment will be higher. Will the idea or merging the USC and PRSI for employees into a new social payment also be revived? It ran into the sand in the last government.

There are no easy options. Any talk of hiking the local property tax is opposed by even those on the left, despite the fact that houses are the main source of personal wealth. A wealth tax might come on the agenda, though this is complicated. We don’t know what future trends in corporation tax will be, though there are well-known threats to revenue here.

Using up our financial leeway and the help of the European Central Bank and perhaps the EU – which is considering a new recovery fund – may get us through the crisis phase. But out the far side, our national debt will be higher and our tax base will be lower. Paying for the clean-up and a bigger State will not come cheap.

To finish with another US president, in his 1988 campaign George Bush snr famously pledged: "Read my lips, no new taxes." A couple of years later, higher tax was just what happened.