Opportunity to take further step away from cycle of boom and bust

Selling fiscal prudence will be politically difficult, especially in an election year

The imminent no-deal Brexit threat when the budget was being framed allowed Minister for Finance Paschal Donohoe to fight off demands for pre-election spending increases. Photograph: Alan Betson

The imminent no-deal Brexit threat when the budget was being framed allowed Minister for Finance Paschal Donohoe to fight off demands for pre-election spending increases. Photograph: Alan Betson

 

Exchequer returns for last year show the public finances ahead of target and this has in turn improved the outlook for 2020. Remember that the budget for this year was an unusual exercise and was drawn up with a no-deal Brexit at the end of January as the central assumption. With this now avoided, the debate on what happens next as the exchequer moves further into surplus won’t be long emerging – particularly with a general election in the wind.

We now have a chance of taking a further step away from the boom and bust cycle of spending money when we have it and cutting when we don’t. But selling this politically will be no easy task – with countless demands for state cash for health, housing and so on.

The imminent no-deal Brexit threat when the budget was being framed allowed Minister for Finance Paschal Donohoe to fight off demands for pre-election spending increases. Most notably, there were no general tax reductions or social welfare increases. As a result the budget surplus should grow this year, possibly to 0.7 or 0.8 per cent of GDP – from 0.4 per cent his year – and possibly higher if corporation tax surges again.

Choice

And so, as we head into a general election campaign, the parties will face a choice. Assuming we avoid a particularly hard form of Brexit, should the aim be to move the exchequer further into surplus over the next couple of years, or use the extra cash to push up spending or cut taxes? Donohoe has said that he believes that the figures should be kept in surplus, rising to more than 1 per cent of GDP by 2022.

It remains to be seen how this is dealt with in the party manifestos and how the inevitable “promises” of lower tax and more spending will be balanced against the need to protect the exchequer finances as growth rates vary from year to year.

Ironically it is possible that the budget for next year may again be presented against the threat of another kind of no-deal Brexit – the UK leaving the transition period without agreeing a future trade deal with the European Union.We probably won’t have a much better fix on this by the time of the general election, even if this is delayed until May. Even next October, Budget 2021 may well be framed against the risk of this other kind of no-deal Brexit.

The next few years carry significant uncertainties, not only from Brexit but also from risks of building international trade tensions and international corporate tax reform. The economy is also close to capacity, in some areas at least, which will also – on its own – slow growth at some stage. Then there are the complete unknows, not least the latest tensions in the Middle East.

And then there is corporation tax. Growth here has been astonishing – jumping 140 per cent plus since 2014 to almost €11 billion last year, close to one euro in every five of tax collected.This revenue, or most of it , may stay with us. But we need to be ready for a possible impact from a reform of the rules under which these companies pay tax internationally – which may be finalised this year, though agreement is still some way off.

And we also need to be aware of the vulnerability to changing strategies by the 10 or so big US companies responsible for not far off half our corporate tax revenues. We saw this week how Google moved its intellectual property (IP) back to the US from Bermuda, a move directly related to the ending of the double-Irish tax regime, which it used to get the cash to Bermuda in the first place. What we don’t know is what this means for its long-term intentions for its corporate structure and its international investments – including its massive Irish base.

Ireland has benefited in recent years from IP being moved here from international tax havens by big players such as Apple. Investments associated with this are one reason why corporation tax has surged, even if the picture is complicated. But will this IP stay here in the long term? We just don’t know, but Google’s move again shows us how quickly things can change and how how bringing investment “back home” may be attractive to some US giants.

Credible commitments

It is impossible to be dogmatic about what budget targets should be set – and thus difficult for the political parties to put this in their election pitches. It all depends on how the economy grows and what happens on the big risks. But what we need are credible commitments to build up surpluses if the good times continue – to give scope to spend more,tax a bit less and support sectors and jobs if we are hit by a shock.

It sounds like common sense. And it is. But as the budget surplus grows this year, so too will the calls to spend a bit more and tax a bit less. The Taoiseach wants to cut taxes. Ministers want more cash for their own departments. Lobby groups demand extra, often with good cause. It is about finding a balance and realising that making one area a priority means spending a bit less somewhere else. Or raising a bit more tax. It is about changing the “when we have it, we spend it” mindset that infects Irish politics.

The pressure will come as the general election will probably largely be fought on the battleground of health and housing. Having dodged the immediate Brexit bullet, the economy will likely remain strong – and some areas could get even stronger in the short term. This will make the politics of this all the trickier. We say we want to get off the roller coaster and escape the boom-bust cycle. But can the consequences – squirrelling money away in the good times – be sold politically?

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