Looming election may tempt Michael McGrath and Paschal Donohoe to spend
Public Expenditure Minister Paschal Donohoe and Finance Minister Michael McGrath.
Facing potentially their last budget as Government colleagues, with a war chest the envy of other European nations, Finance Minister Michael McGrath and Public Expenditure Minister Paschal Donohoe may have to resist the temptation to spend freely despite an election looming.
Governments loosening the purse strings and dropping some cash going into an election is nothing new in politics but such moves would run contrary to the conservative tone set by the pair of ministers over the last few years particularly when it comes to the area of corporation tax receipts which have been bolstering the public finances.
The refrain the public often hears from the pair is that the huge surpluses the country is recording is largely due to “windfall” corporation tax receipts which can’t be relied on and so should not be used to cover permanent spending increases. So instead they’ve moved to ring fence these funds for future use.
However, not all of the surplus will be going into these funds and the two politicians might start to feel the pressure from colleagues to spend just a bit more in the coming months. Mr Donohoe might feel that pressure more than Mr McGrath as new Taoiseach Simon Harris will be desperate to hold onto that office just a little longer.
Regardless of the minister’s warnings, the public finances are in good shape according to the latest stability programme update. It projects the Government to run a surplus of €8.6bn this year with €38bn worth of surpluses expected to be raised by the end of 2027.
On the expenditure side, the Department is forecasting gross current expenditure to increase by €1.5bn this year.
The total tax take this year is expected to run to over €92bn of which €34bn will be in income tax alone. Corporation tax take is expected to be close to €24.5bn this year but the Department has said €11.2bn of this is considered excessive.
The Department of Finance also noted that changes in corporation tax rules could lead to a reduction in tax take. The new rules around corporation tax - which sets a new minimum corporation tax rate of 15% for companies with annual turnover in excess of€750m — will result in a “significant loss” of corporate tax revenue.
If it is a significant loss, it is not evident in the department’s forecasts which projects corporation tax to remain steady and even increase slightly over the coming years. By 2027, these tax receipts are expected to generate nearly €26bn in revenue.
Mr McGrath has already moved to insulate a good proportion of these surpluses by establishing two investment funds — the Future Ireland Fund (FIF) and the Infrastructure, Climate and Nature Fund. The Department has earmarked €4bn this year for the FIF this year with over €6bn going to the two funds over the coming three years.
The creation of these funds may in turn create a headache for the minister as it means less room to manoeuvre when it comes to actually doling out cash on budget day with coalition parties already promising big.
At Fianna Fáil’s recent Ard Fheis, the party leader Micheál Martin backed cuts to personal income tax, increases to renter’s credit as well as an increase in funding for childcare.
Fine Gael leader Simon Harris wants the renters tax credit increased to €1,000 and reiterated his party’s policy that the cut-off rate for the higher rate of income tax should be set at €50,000 instead of the current of €42,000. The USC is also on the party’s chopping block but Mr McGrath said this week no decision has been made on the tax’s future.
Mr Harris is also reportedly planning a €70m tax package for businesses.
On top of these, both parties have also made promises on housing targets.
Economists have advised the ministers not to bend to the political temptation that a looming election presents and inject more money by way of unnecessary tax cuts into the economy.
Economic and Social Research Institute (ESRI) economics research professor Kieran McQuinn said the institute feels “very strongly” that the Government should not spend the State’s huge surpluses at a time when the economy is already expanding at a healthy rate.
He argued against tax cuts particularly when there is already broad agreement that it should spend large amounts on housing, hospitals, and other important infrastructure projects.
Economist Austin Hughes said he was worried that the Government would do a giveaway budget later this year that splurges a lot of money on voters ahead of a general election. He favours spending money mainly on healthcare and housing, when it will have the opportunity to increase public spending substantially in the next couple of years.
The stability update notes that the Government is conscious that housing levels remain below what is needed to meet demand. Newly installed Taoiseach Simon Harris has pledged to build 250,000 houses over the next five years but that would require them being in office following the next election.
Nevin Economic Research Institute co-director Tom McDonnell said the case for large personal tax cuts is “weak” especially considering the falling inflation rate, the prospect of interest rate cuts and the strong labour market.
Unemployment is forecast to be just over 4.5% this year which suggests the economy remains at close to full employment. The Government forecasts real wages will rise this year as inflation falls.
Given the disinflation expected this year — headline inflation is now projected to run at 2.1% during 2024 — the Government is also projecting real income growth boosting wages. It is expected that this will support consumer spending later in the year.
Consumer spending is expected to grow by 2.4% this year as a result of all these changes.
Earlier this month, Mr McGrath promised a substantial income tax package for voters and following the release of the update he did not rule out any additional once-off cost-of-living payments come the autumn.
While the public coffers may be in good health, the Department of Finance still revised downwards a number of economic forecasts for this year.
Gross domestic product (GDP) is now projected to grow by 2.6% this year compared with the 4.5% growth projected in the budget last October. However, GDP is not the best measure for the Irish economy as it is heavily influenced by the presence of multinationals here as well as their exports.
Modified Domestic Demand — a measure that excludes the activity of multinationals — is expected to grow by 1.9%, compared with the 2.2% growth forecast in the budget.
The update notes that consumer spending has softened recently while investment in machinery and equipment by firms has weakened.
These trends reflect the restrictive stance of monetary policy and its transmission into the economy.
During a press conference this week, the two ministers wouldn’t be drawn on how much additional spending might be available on budget day instead saying that will be decided during talks with the party leaders when the summer economic statement is finalised.
The election has to be held by March 22 next year which means one budget and one Christmas to go before a likely campaign is to kick-off. So going into the summer economic statement, Mr McGrath and Mr Donohoe may find themselves under pressure from their party leaders to spend just a bit more, be it through tax cuts, additional payments to households, or increases to social benefits.
With the money expected to be generated over the coming years reaching eye-water levels, it remains to be seen whether this Government — or in fact any of the coalition parties — will be returned to office so they can spend it.
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