Anthony Foley: Ireland's taboo on borrowing has been temporarily broken

The Budget should have signposted the future path for the higher tax levels needed for higher public expenditure

Tue, 12 Oct, 2021 - 18:06

Anthony Foley

This budget was brave. It resisted the temptation to spend more than was previously committed to despite a better-than-expected public financial position coming into the budget and it went ahead, as planned, with carbon tax increases despite the expected energy price increases.

As usual, the money available at budget day falls far short of the total asks and expectations. This is more pronounced than usual for Budget 2022 for two reasons.

The Irish Government borrowed billions to deal with Covid; many people ask why can’t it borrow billions to increase pensions and solve other problems. The taboo on borrowing among much of the population has been temporarily broken.

There is now a general acceptance that Irish society needs a larger State sector than previously. This is reflected in the broad lines of the budget with only about €500m in tax reductions and over €4bn in expenditure increases. One little criticism is the new approach of presenting several variables as a % of GNI* only, contrary to the previous practice of using both GDP and GNI*.

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The Summer Economic Statement expected a budget deficit for 2022 of 3.4% of GDP. The pre-Budget figures expected a deficit of 1.4% of GDP before the Budget day measures. After the Budget measures the figure will be 1.8%.

The Irish state sector is smaller than many other EU economies. In 2019 public expenditure as a per cent of GDP was 46.6% for the EU as a whole. Belgium was 52.1% and France was 55.4%. Ireland trailed well behind with a figure of 24.5%. GDP is not a good measure of Irish economic activity.

Using GNI* the public expenditure share was 40.5% which is still relatively low. More exact comparisons should consider things such as defence spending and population mix.

We have major problems with health, education, water and electricity infrastructure, housing shortages and problems with many thousands of houses we did build. In addition, the notion of the average reasonably satisfied citizen is less apparent.

Middle-aged parents on reasonable salaries find it difficult to finance their children’s university education. Well-paid young people find it difficult to purchase a home and expensive to rent. People who bought their houses now find them uninhabitable. These issues will not be dealt with in one or several budgets but each budget should be a clear and transparent staging post on the longer journey.

Large public sectors require large tax revenues but the Programme for Government promised no increases in income tax and USC rates and that Budget 2022 would index credits and bands to earnings which it did. Of course, there are other taxes than income.

The Budget should have signposted the future path for the higher tax levels needed for higher public expenditure. The Minister, of course, argued he is waiting for the report of the Commission on Taxation and Social Welfare. The medium-term figures published with the budget suggest that on current thinking total government expenditure as a % of GNI* will be 39% in 2025, not evidence of a much bigger state sector.

The big long-term issue is financing a larger public sector and the budget says little on this but keeping to the original Budget package was welcome… and brave.