Ireland’s giant surplus, the forthcoming election and the prudence pushback

Michael McGrath and Paschal Donohoe have warned ministers there cannot be a budget free-for-all. They will have their work cut out

Minister for Public Expenditure Paschal Donohoe and Minister for Finance Michael McGrath are determined to contain Government spending but will struggle to hold back their Cabinet colleagues. Photograph: Dara Mac Dónaill

It’s early days, but Paschal Donohoe and Michael McGrath have been laying down the law.

Less than a week after the two budget ministers – Donohoe in the Department of Public Expenditure and McGrath in the Department of Finance – published their fiscal and economic projections, predicting budget surpluses of eye-watering magnitude in the coming years, the two men delivered a stern warning to their ministerial colleagues at this week’s Cabinet meeting, according to multiple sources.

If the Cabinet ministers resembled cartoon characters with dollar signs in their eyes, the intention was to disabuse them of the notion that a ten billion euro free-for-all is in prospect for this year. Both men explicitly made the point, say people both present and briefed afterwards.

Moreover, they were clear to colleagues that they would not be swayed by special pleading in public, or leaks that the Government was planning on various plans for spending increases, tax cuts, etc.


Taoiseach Leo Varadkar – a man not averse to public musings about the budget, it’s fair to say – addressed the subject in the Dáil on the subject later that day:

“Money is not the constraint that it used to be in terms of solving our problems,” the Taoiseach said. “We have a lot of money and we are spending a lot of money.”

Experience suggests that ministers tend to be vocal advocates for these virtues in their colleagues, rather less so for themselves

However, he also warned: “We need to be a bit more upfront and honest with people... It is not just a case of spending the surplus and solving all our problems. We are already allocating massive amounts of public spending... It is not just about writing cheques and solving problems. It would be very easy if that was all that was involved.”

Taoiseach Leo Varadkar is prone to musing aloud about costly budget measures such as a new middle rate of income tax. Photograph: Gareth Chaney/Collins Photos

The following evening, he told the Fine Gael parliamentary party meeting that priority in the next budget will be middle income families and “earners who pay too much tax”.

He also promised a welfare and pensions package which will “hopefully be similar to last year’s”

Sombre agreement

At the Cabinet meeting, Ministers nodded gravely, in sombre agreement of the need for budget prudence and fiscal discipline, no matter what the political cost, though experience suggests that ministers tend to be vocal advocates for these virtues in their colleagues, rather less so for themselves.

In any event, the two ministers and their officials are determined that the budget process, and its decisions, will proceed according to the accepted norms. That means that the next step will be the National Economic Dialogue, a big Dublin Castle talking shop in mid-June which gives all the stakeholders – unions, employers, some NGOs and what used to be known as the “social partners” in the Bertie Ahern era – the opportunity to make their case for a bigger share of the pie.

In July, the Government will publish the Summer Economic Statement – the “key anchor” of budgetary policy, Donohoe said this week, while giving as little away as possible at the Dáil Budgetary Oversight Committee.

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The Summer Economic Statement will show the guardrails within which the Budget will be framed. There will be much focus on what it says about the Government’s spending rule, which is to limit expenditure increases to the level of growth in the economy. But this isn’t really a rule, or at least, not one that absolutely has to be kept. Expenditure growth last year was nearly 50 per cent higher than the five per cent ceiling the rule implied. As senior Government figures will privately admit, it’s not a rule if you don’t have to abide by it. It’s more of an aspiration.

At the Budgetary Oversight Committee on Wednesday evening, Sinn Féin’s Pearse Doherty asked McGrath directly if he will stick to the 5 per cent rule this year. Maybe, maybe not, was the thrust of the response. We’ll tell you in July. Translation: not a chance.

After the summer statement is delivered, officials will consider the options for the Budget in the tax strategy papers, noting also the midyear expenditure management reports. The Budget will be on Tuesday, October 10th.

The budget wrangles

But while this transparent and structured process is unfolding over the coming months, there are two other parallel and subterranean budget wrangles going on as well.

The first is the mad scramble that has already begun to claim a share of the surpluses projected in last week’s figures. At the head of the queue are all the Government departments, who seek to increase their settlements every year in the annual budget negotiations. Their asks will be a mixture of the increased costs of providing for the existing level of service, and for additional services or new policies.

They will feel that they should be high up the queue for a share of the spoils, and many of them can rely on helpful media coverage to make their case

For example, the cost of paying for medicines and running hospitals will increase for the Department of Health. That’s an increase in the cost of the existing level of service. But the Minister for Health Stephen Donnelly may also, say, want to extend free GP care. That’s a new policy. Both require budget increases. Every Government department will have its own list; all will claim they have a pressing case.

But there’s also a whole range of other groups that are funded by the Government that will be seeking budget increases. Many public services – from housing to the care of people with disabilities – are provided on behalf of the public by third parties, be they approved housing bodies or charities such as St Michael’s House and St John of God. Some of these organisations, particularly in the social care field, have been struggling on a shoestring for years. Every one of those will be beating a path to the Government’s door in search of more money. They will feel that they should be high up the queue for a share of the spoils, and many of them can rely on helpful media coverage to make their case.

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Then there are the public sector unions, which will seek to open negotiations soon with the Department of Public Expenditure on a new public sector pay deal. A series of recent union conferences, continuing in the coming weeks (the nurses are up next), will make clear that either the Government coughs up for a generous pay deal, or it can expect a range of strikes next autumn and winter. The electoral cycle and the public finances have aligned nicely for the unions, putting maximum pressure on the politicians just when they have the ability to pay. This won’t be cheap.

The second parallel budget process is less detailed, but more intensely political. Indeed, it may be the most significant set of political decisions taken by the Coalition: how does it use the surplus to position itself for the next election – without fundamentally undermining its claims to fiscal responsibility?

Minister for Health Stephen Donnelly faces more pressure than most Cabinet members to increase spending thanks to the huge demands of the health service. Photograph: Gareth Chaney/Collins Photos

All this, then, is the politics of a giant surplus.

It is not, of course, as simple as splurging money before an election and then collecting the votes of a grateful public. It’s easy to spend money unwisely, unproductively and in a way that is politically unprofitable. But Irish political history – think of the two re-elections of Bertie Ahern – shows that the relationship between government munificence and electoral popularity is a strong one. And it is certainly the case that a government which is viewed as too parsimonious, or as having managed the public finances badly, will find it impossible to be re-elected.

Budget giveaways

The truth is that the exact nature of the relationship between budget giveaways and electoral fortunes is complex. But what is certain is this: most politicians believe that budget giveaways will boost their popularity.

And to be fair, there is some support for this in the opinion poll numbers of last autumn, where a big budget giveaway was followed by modest opinion poll gains for the Coalition parties. It’s maybe more accurate to observe that because of the budget, the parties weren’t monstered in the polls by the cost of living crisis, as the British government was.

Either way, the view is strongly held within Government that the last Budget was a political success. According to several people who will be involved in the discussions, it is the model that is likely to be followed this year.

What does that mean? Well, it means that a lot of money will be spent. Last year’s budget day total topped out at around €11 billion, of which about €7 billion was recurring expenditure – through spending increases, higher welfare payments, a modest programme of tax adjustments – and €4 billion was “one-off” payments to help with the cost of living. The latest of those, by the way, a €200 payment to social welfare recipients, was paid this week. All this largesse was accompanied by the transfer of €6 billion between last year and this year, into the Government’s “rainy day” fund.

It is very likely that this year’s Budget day package will follow a similar model. The two ministers will seek to limit the increases to recurring expenditure – though they will be substantial – boost the size of the package with one-off payments and put as much money away as they can.

But the political pressures to spend, spend, spend will be intense. Talk to Government politicians of all ranks and there is certainly a commitment to running prudent public finances. But there is also a fear of being so prudent that it damages them electorally.

The great gushing river of revenue from the tech and pharma multinationals might continue to flow, but it might slow to a droughty trickle. We just don’t know

There is a view in Fine Gael that this is part of what happened to the party at the last election. This is based on flimsy enough evidence, but it is a widespread belief nonetheless, and many Fine Gaelers are strongly of the view that this should not be repeated. Probe deeper and there is fear of handing over pristine public finances to a Sinn Féin government – something some Fine Gaelers think they did to Bertie Ahern in 1997.

Leo Varadkar is expected to insist on significant tax reductions; last year he floated the idea of a third, intermediate rate of income tax, something like 30 per cent. He is likely to do so again. It will be fiercely resisted within government. That will be an early flashpoint.

The big danger

But the real danger for the country is not, really, that the Coalition might be too prudent. It is rather the opposite. The projected surpluses are mind-boggling, but unreliable; the great gushing river of revenue from the tech and pharma multinationals might continue to flow, but it might slow to a droughty trickle. We just don’t know. There is an institutional terror in the Department of Finance and the Department of Public Expenditure about building in permanent expenditure commitments on the back of what might turn out to be temporary revenues.

Minister Eamon Ryan argued this week that the size of the State needs to expand to deal with the needs of a growing population. Photograph: Gareth Chaney/Collins Photos

It is undoubtedly true, as Eamon Ryan said during the week, that the State needs to get bigger to deal with a bigger population, and all the challenges that come with that. There are clear, pressing needs in housing, in healthcare and in social care that will only be tackled by increased – and in some cases dramatically increased – public expenditure.

But it is also true that the bigger State will have to be paid for, and we cannot rely on the multinationals to pay for it forever. Expenditure increases will not just have to be sustainable, but effective in the medium term, and not just good for a Budget Day headline. But all that requires the sort of medium-term prioritising and strategic vision that our politics has not historically been good at, and for which the electoral rewards have been scant.

Donohoe and McGrath have left their colleagues in little doubt about their intentions – they will spend, and spend big; but they will not, in the words of one insider, “go mad”. The prudence pushback has begun. But, by God, they have their work cut out.