Public spending is ballooning. There may be trouble ahead

In recent weeks the Government has pledged billions to redress schemes and housing

European Central Bank president Christine Lagarde and Minister for Finance Paschal Donohoe in Luxembourg. Photograph: Francisco Seco/Pool/AFP via Getty

European Central Bank president Christine Lagarde and Minister for Finance Paschal Donohoe in Luxembourg. Photograph: Francisco Seco/Pool/AFP via Getty

 

Three good causes, all deserving of Government assistance, at a cost of €3 billion (at least) to the public purse. But where does it end?

There is widespread and justified sympathy for the women who spent time in the mother and baby homes, who had their babies taken from them and in many cases were treated with cruelty and callousness. In a few weeks the Government will announce a compensation scheme. Money cannot give back what was taken from them, but it can do other things. The total cost is likely to be more than €1 billion.

The plight of people in Donegal and other counties who have been affected by defective concrete blocks also requires action by the Government, most people would agree. Through no fault of their own, they are seeing their houses fall apart. They need help, and the Government should give it. The current compensation scheme is slated to cost more than €1 billion, probably more, and possibly, officials worry, much more.

Facing a chronic shortage of housing and fearing a spate of rent increases as the economy opens up, the Government is responding to political pressure on housing by moving closer and closer to Sinn Féin’s housing policy and requiring the Land Development Agency to focus on the provision of social housing in Cork and Dublin. The Cabinet approved amendments to the relevant legislation this week. This adjustment of the agency’s semi-commercial remit will cost the State money, though the exact amount has not yet been shared with Ministers. The figure was excised from the Cabinet memo on Tuesday, one Minister complained. I am told it is more than €1 billion.

The Government should spend public money compensating the mother and baby homes survivors. But where religious orders are culpable, they should contribute, and the State’s contribution should be capped.

The Government should spend money helping the Donegal and Mayo householders. But it should not give an open-ended guarantee to spend sums as yet unquantified.

The Government should spend more money building houses. But it should do so in a way that achieves the best value for money possible, and doesn’t just end up inflating the costs of construction because vast sums have been chucked at an industry that has limited capacity. And long term, expensive policy should not be made in a political panic.

The State cannot continue to meet every demand for extra spending with the question: how much do you want?

More projects

The issues outlined above are likely to cost €3 billion at least. And the recovery plan announced two weeks ago is likely to cost €3 billion (or was it €4 billion?). On the same day came the pledge of a welfare package from the Taoiseach and a suggestion to cut taxes from the Tánaiste. The reviewed National Development Plan be here shortly. The new “housing for all” plan is imminent. Also a climate action plan. All will require more spending. Ministers are resisting any changes that would see them lose projects already committed to. New projects will require new money.

In the past few weeks, the State has taken on huge new costs equivalent to those usually involved in an annual budget day. There has been practically no debate, and few if any voices querying the affordability of the decisions. Reading the Dáil debates on some of these issues, it’s clear there is no constituency for restraint in spending. TDs strive to outdo one another to call for more public money.

We are in the middle of the biggest expansion of public spending, across a variety of headings, since 2004-2007, when Brian Cowen was moved to the Department of Finance to replace Charlie McCreevy, who insisted on pulling back spending when his resources declined.

Paschal Donohoe’s instincts lie towards prudence – and there are many of his colleagues who believe he was too prudent before the last election and cost Fine Gael a lot of votes. He believes that the Keynesian spending of the past year and a bit is entirely justified – he is right – but with the reopening gathering pace and an economic recovery almost certainly revving up, he should now be thinking of dialling back the deficit spending, not accelerating it.

Summer statement

He will soon be called upon to show us the colour of his money. The Government will shortly publish its summer economic statement. Will it contain targets for deficit reduction? Will it seek to anchor the public finances to a clear budgetary strategy? Or will it continue the fiscal incontinence of recent months? Behind the scenes, battle is raging. We will see the results pretty soon.

Proponents of continued deficit spending point to the newly fashionable idea of modern monetary theory, or MMT, which they say allows for continued deficit spending because of governments’ ability to finance themselves through printing money.

They may be right. There may be a new fiscal paradigm that allows governments to avoid hard budgetary choices. Or the world will turn out to be less benign, and governments will eventually have to live within their means, raising taxes to finance their spending. Either way, this will not be Ireland’s choice to make alone; the EU will make it. The EU will gradually reintroduce the fiscal rules, and countries will have to run much smaller deficits. When that happens, MMT will start to sound like a magic money tree.

At the rate we are going, we will soon have a much bigger and more expensive State. Maybe we will be able pay for it by endless borrowing. That seems like one hell of a gamble to take.

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