€6bn has been removed from the budget day pot. Politically, this could get interesting

At one of the last cabinet meetings chaired by Leo Varadkar the cabinet agreed to publish draft legislation drawn up by Minister for Finance Michael McGrath to establish two funds to save some of the massive inflow of corporation tax for future use. It is a prudent plan, given the unpredictability of these revenues.

But, as the legislation wends its way through the Oireachtas, the penny will start to drop on the Government benches. Some €6 billion is being effectively taken off the table for October’s budget and saved for the future. And that is going to leave less for spending rises and tax cuts in what – if the Government lasts that long – will be the last budget day before the general election.

On the forecasts made in the last budget in October 2023, the Government will still have enough room for a generous budget, even allowing for the €6 billion being put aside into the two funds next year. The budget predictions were for a general government surplus of more than €14 billion in both 2025 and 2026.

This leaves plenty of leeway – though not as much as the headline figure suggests, because the European Union (EU) borrowing measure does not count in the money being put into the funds, as it is moving from one part of the State coffers to another.

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However, putting money into the funds reduces the amount of cash available to the exchequer and thus the room for budget measures.

These forecasts will be revised in the Department of Finance Stability Programme Update, due to be published shortly, when the point about the reduced room for budget measures – and the ongoing uncertainty about corporation tax – are both likely to be underlined.

A significant part of the budget leeway in the years ahead will go towards putting cash into the two funds. But the forecast for the cumulative surpluses over the next few years will be significant.

In last year’s update the forecast for the 2023-2026 period was for a total surplus of €65 billion and there appears no reason to expect that the 2024-2027 period to be included in the new update will be any less than this.

What about Budget 2025? Counting in all permanent and temporary measures, Budget 2024 cost the exchequer €14 billion, but it is clear that there will not be the leeway to do something on that scale this October. The Stability Programme Update will have an updated official estimate of what might be available.

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This leads to one awkward political question: are the temporary measures announced to support living standards during the cost of-living crisis to be repeated? Or, with the rate of inflation falling – but prices still high – will the Government try to phase out giveaways such as the energy credit?

Remember that much of the leeway will be used up by the annual pressure to spend more in areas such as health – and there is no guarantee that corporation tax will again outperform.

And judging by the ardfheis motions, Fine Gael will want to also be able to afford tax cuts aimed at middle earners. Although Varadkar may have gone from Government, the idea of a 30 per cent middle income tax rate lives on, as does the target – mentioned by the new Taoiseach – of ensuring single people do not enter the higher 40 per cent tax net on incomes of less than €50,000.

The funds would also - as we have seen - reduce the scope for politicians to spend excess corporation tax receipts over the coming years; using them to prop up day-to-day spending would be particularly dangerous, due to their potential volatility.

The idea for the funds emerged due to concern about the sustainability of the surge in corporate tax revenues and has been brought through cabinet by McGrath.

The Department of Finance has estimated that not far off half of all corporate tax collected in the State may be windfall in nature, meaning it does not relate directly to economic activity here and is thus vulnerable to decisions made by big companies.

The narrow corporate tax base – with three or four companies paying more than 40 per cent of all corporate tax – is an additional risk.

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To combat this, the Department proposed the creation of a long-term vehicle – the Future Ireland Fund – which could build up to a significant sum of €100 billion by 2035, on its calculations.

The interest from this would then help to support the exchequer in the years ahead, reducing the need to raise taxes to pay for longer-term bills relating to an ageing population, or climate change.

The funds would also – as we have seen – reduce the scope for politicians to spend excess corporation tax receipts over the coming years; using them to prop up day-to-day spending would be particularly dangerous, due to their potential volatility.

In the subsequent discussion, there was some pushback to the idea of locking money away for such as long period – the plan is to pay into the fund for 12 years. That is why, as well as the Future Ireland Fund, the longer-term vehicle, the Government announced a second vehicle, the Infrastructure, Climate and Nature Fund.

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Money is due to go into this fund up to 2030 and it is designed to be available in the event of an economic downturn, to ensure that the State could continue to invest; slashing investment spending after the financial crash has had a huge economic cost for Ireland. This fund, as its name suggests, it also to help pay for future climate and nature investment from 2026 on.

Putting money aside is a positive move as we know that additional bills are coming down the tracks. From an intergenerational point of view, it is also the right thing to do.

Contributions to the Future Ireland Fund are set by legislation at 0.8 per cent of GDP – which is about €4.1 billion at the moment. The Minister for Finance of the day can halve this to 0.4 per cent of GDP if he or she judges there has been a “deterioration” in the economy, and can reduce it to zero in the event of a " significant deterioration”.

How these benchmarks would be met is, of course, debatable. And as we saw with the old National Pension Reserve Fund during the financial crash, new legislation can always lead to things changing – the bulk of that fund was diverted to help pay for the bank bailout. A new minister for finance can thus always propose a change of the rules.

Some €2 billion a year is due to go into the Infrastructure, Climate and Nature Fund. It can be deployed to help support State investment in the event of a “significant deterioration” in the economy. And in any case a portion of the cash will be available to support projects in areas such as climate, water and biodiversity.

It is a complicated structure – but its net effect, in terms of the budget, is clear. It leaves less money for measures over the next few years – potentially the final budget of this Government and the early budgets of the next one. If the corporate tax bonanza continues, then this may not matter. But with pressure on spending, any wobble on the tax front could quickly reduce the room for manoeuvre.

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Putting money aside is a positive move as we know that additional bills are coming down the tracks. From an intergenerational point of view, it is also the right thing to do – otherwise those now starting out on their working lives may face significantly higher taxes to help pay for the pensions of the older members of the workforce. Given their currently disadvantaged state in the vital area of housing, this hardly seems fair.

But politics goes from one year to the next – and from one election to the next. So it will be interesting to see the forthcoming committee stage debate on the funds legislation and the attitude of the main Opposition parties; as well as the Government backbenchers.

Money taken off the budget table might be the correct strategy, but politically this one could get interesting.