Spending rules to be paused as Coalition plans big additional budget spend

The Coalition will move significantly beyond its previously indicated €1.5 billion package of welfare increases and tax cuts in Budget 2023 and is set to shelve its rule of holding the rate of spending growth to 5 per cent in light of surging inflation.

With discussions set to continue over the weekend ahead of the publication of the summer economic statement on Monday, the key pre-budget document, senior Government sources indicated that the cash spending in the package would be the most substantial of recent years, though they conceded much of it was to compensate for inflation rather than representing any significant real increases.

Officials are examining plans to index-link tax bands to wage growth as part of an eventual plan to link both bands and credits to wage growth. Allowing for this and the extension of indirect tax measures will mean that the budget day figure for tax changes will increase from the previously planned figure of €500 million.

An increase of €10 in weekly welfare payments would cost €750 million and, with pressure for a higher figure and other measures, the additional spending on budget day will go well beyond the planned €1 billion.

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One senior source said that, as part of Budget 2023, resources would be used “simply to stand still” because of the overall impact of inflation.

“The amount of actual new spending will not be dramatic.”

Taoiseach Micheál Martin said on Friday that about 110 proposals on issues such as childcare, pensions, housing and education were made at a lengthy Fianna Fáil meeting on the cost-of-living crisis. The surge in inflation has also pushed the Government to revisit its own fiscal rules.

It is expected that the Government will signal that the rule that increases in permanent spending must be held to 5 per cent does not give enough room for manoeuvre when welfare and public pay have to be adjusted to take account of rising prices. Negotiations are set to continue this weekend about what level of spending increases are now appropriate between budget Ministers Paschal Donohoe and Michael McGrath and the three party leaders.

Balancing act

The Government will want to leave room for a significant welfare and spending package in the budget, but will not want to fuel inflation by pushing up spending too quickly. Tax figures for the first half of the year will confirm that revenues remain far ahead of target, increasing the political pressure to spend more on budget day. Spending increases will also have to take account of a possible public pay deal.

Speaking on Friday, Mr Martin said measures in the budget would have an “immediate impact” this year. He also defended the Government strategy of an autumn budget in the face of Opposition calls for it to be brought forward to summer.

The Coalition is coming under increasing pressure as inflation in Ireland hit 9.6 per cent and Electric Ireland announced price increases that will kick in next month.

Concerns about the cost of living have surpassed the housing crisis as the number one concern for people, according to the latest polling by Ipsos. Asked what is the most important issue facing Ireland today, nearly a third of respondents (32 per cent) named inflation and the cost of living, an increase of 10 points since last month.

A further 4 per cent of respondents said fuel prices were the most important issue, while another 6 per cent nominated the economy as the most important issue.

Inflation has overtaken housing as the biggest issue since last month, according to the monthly Ipsos poll, with 31 per cent (a decline of a point since last month) saying that housing or homelessness is the most important issue facing the country.

Heathcare was identified by 5 per cent of respondents and climate change by 4 per cent as the most important issue. Just 2 per cent said they believed Covid-19 was the No 1 issue. Lack of faith in government and politics was the most important issue for 2 per cent of respondents.

The Ipsos monthly issues poll is conducted via telephone among 700 people over 16 every month.