Tom McDonnell: Government should abandon populist tax cuts in Budget 2024

We need to protect low-income households from cost-of-living pressures — not half-heartedly through once-off measures but through structural uplifts in working age and old age payments

While net household wealth has reached record levels and corporate profits are healthy, deprivation rates are on the rise. File picture: Leah Farrell/RollingNews

The Irish economy is in an unusual place. It’s been buffeted by Brexit, by the shock and disruption of the covid crisis, and is still working its way through an energy price shock and the cost-of-living crisis.

There is a sense of winners and losers: Net household wealth has reached record levels and corporate profits are healthy but deprivation rates are on the rise.

The labour market has never been stronger despite an underlying sense of perma-crisis.

Total employment, the employment rate, and hours worked are all at or near record highs while the unemployment rate is at a record low. We have clear capacity constraints across the economy particularly in construction.

And yet, real wages declined over the last year. Inflation remains high, albeit falling, across most of the eurozone, while fear of core inflation becoming “sticky’” will lead policymakers at the European Central Bank to increase interest rates twice more this year, and they will only start to gradually reduce rates sometime in 2024. Rising interest rates will eventually start to weaken demand and growth across the eurozone, including in Ireland. However, so far, the economy is holding up.

Economies move in cycles and each of these cycles has its own unique causes and characteristics.

A correct understanding of whether the economy is overheating, in recession, or somewhere else along the cycle matters greatly for budgetary policy and for the appropriate fiscal stance taken by Government.

If the economy is in a downswing then it makes sense for Government to stimulate the economy in a Keynesian fashion. The opposite is true if the economy is overheating.

Irish governments have a long and unhappy history of pro-cyclical budgets and Budget 2024 seems likely to be the next chapter in this tradition.

The Irish Fiscal Advisory Council has already attacked the government for breaking its own spending rules and for risking overheating, while the Economic and Social and Research Institute and the Central Bank have both cautioned against tax cuts.

The budget — in its current form — will modestly add to overheating and to inflation, while proposed income tax cuts will disproportionately benefit the better off.

We need to protect low income households from cost of living pressures — not half-heartedly through once-off measures as was done last year — but through structural uplifts in working age and old age payments that adequately benchmark against wages and the cost of living. In addition, we need to deal with the chronic issues in housing supply and affordability and, of course, ensure that we allocate adequate resources to support climate action.

There is a long a long list of spending requirements: From waiting lists and chronic underfunding of mental health services, to large classroom sizes, high childcare costs and lack of public transport services.

But resources are not unlimited. The Department of Finance has identified that circa €12bn in annual corporation tax receipts is potentially transitory in nature. The State will need to increasingly invest in housing and to make significant capital investments over the next 20 years to support the green transition.

The Department of Finance is proposing to use the transitory receipts to set-up a State savings vehicle in order to part pay for future ageing costs. There is certainly merit in this strategy. But there is scope to do this and also to set up one or more infrastructure funds.

Crucially, the fiscal rules allow us to increase spending by as much as we want each year provided that there are offsetting measures that increase taxes.

The Commission on Taxation and Welfare recommended only last year that we will have to meaningfully increase Government revenue as a proportion of national income over the medium-term.

Regardless of how we use the transitory funds we will still need significant structural PRSI increases over the medium term to pay for future ageing costs.

• Tom McDonnell is co-director at Neri, the Nevin Economic Research Institute