Alison O'Connor: A boring budget with nothing to shout about would fit the bill

We already know to our cost what happens when we don't put the financial brakes on, writes Alison O'Connor

Ministers Michael McGrath and Paschal Donohoe as they arrive at Dublin Castle for the Cabinet meeting. Picture: Gareth Chaney

ANYONE else finding it difficult to deny themselves at the moment? It can be a range of things can’t it: a small treat in the supermarket, a new outfit, a weekend away, upgrading of the car, or a house extension.

Needless to say, it’s easy for those who have the money to spend; it’s very difficult to observe the pent-up demand being spent all around you if you don’t. Added to the mix are the supplychain issues and the “gentle reminders” to stock up early for Christmas — just in case.

We’re in a not-yet-post-pandemic-in-betweeny-Brexit-complicated-place, with horrible winter lockdowns still fresh in the memory. There is no doubt that it’s all been pushing those spend buttons.

According to the Quarterly Bulletin published by the Central Bank on Wednesday, as economic conditions normalise, it is consumption that will drive the recovery.

It already is. We’re in the middle of a stronger-than-expected recovery, and activity in the domestic economy is predicted to return to pre-pandemic levels this year.

Demand is set to increase further when the bulk of the remaining restrictions are lifted from October 22, with domestic demand expected to rise 5.5% this year and just over 7% next year.

Figures from the Department of Finance show Vat has generated €12.6bn so far this year — almost €900m more than anticipated.

Again, this can be attributed to the retail bounce since shop doors reopened in May.

So there is no doubt whatsoever that we are on the rebound. And you know what they say about that kind of situation — take your time before you do anything drastic.

Similar upswings have happened in other places but, like so much of living through a pandemic, we really do not know where things go from here.

It is with this backdrop that decisions are being taken on how the Government will spend the contents of the national wallet as the finishing touches are being put to Budget 2022. This is the first 'normal' budget for this three-party coalition, given last year’s extraordinary circumstances where money was virtually thrown at the Covid problem — appropriately for the circumstances we were in.

To put it in context, last year we had a budget of almost €18bn, while the years preceding that were closer to €3bn.

There is a serious balancing act to be done with the budget every year, but this year really is a particular case.

One senior government source described the challenge as a “demanding ask” in terms of that fabled fiscal balancing, where we reduce our extra levels of borrowing while also “trying to help the country heal” from the effects of a global pandemic.

Another described it as being about “recovery and unifying society and improving services, especially health waiting lists”.

So the task for Finance Minister Paschal Donohoe and Public Enterprise and Reform Minister Michael McGrath, on Tuesday — having to combine post-pandemic stress with global and domestic financial realities — really is made tougher. Added to this are the public indications coming from some in government in recent times that Budget 2022 will be putting a big smile on a lot of faces.

Consideration also needs to be given to the ultimate costs involved in a special Covid payment for frontline workers, as well as the mica problem, which will run to billions — although both these issues have been separated from Budget day.

The pandemic unemployment payment has been cut from €350 to €300 per week, but there are still around 110,000 people receiving the payment. There is no obligation on these people, as things stand, to seek work. The Department of Social Protection, which has already been making contact with many of them, will be increasing its efforts on this front, not least given the staffing shortages in sectors such as hospitality and hairdressing. Many restaurants are only opening for a few days a week and the real state of the hospitality landscape will not be fully known until all State payments are withdrawn.

Despite upbeat financial forecasts, the two ministers have said there would be no changes to budget or tax plans next Tuesday.

As things stand, there is €1bn allocated for new spending measures on the day, while €3.7bn has already been allocated and €500m has been set aside for tax measures.

They may make the case to Taoiseach Micheál Martin and Tánaiste Leo Varadkar for the need for relative budgetary conservatism, but all four men are clearly conscious of the political realities that will face Fianna Fáil, Fine Gael, and the Green Party at the next general election.

The two bigger parties, Fine Gael in particular, feel their safe pair of hands approach to the economy in the last general election was not rewarded by the voters. This is in comparison to the success of Sinn Féin and the prevailing fear that it will be considerably more successful next time.

This analysis does not factor in the significant anger on the part of the electorate in 2020 over our housing and health services crises, and the rich fodder both topics still provide, not just for Sinn Féin, but all opposition parties.

The budgetary nudges from Mr Varadkar in recent times have most political observers, including some of his own TDs and senators, scratching their heads in puzzlement as he appears to indicate his backing for a generous, left-leaning budget package, whether it relates to welfare increases, tax packages, or fuel allowances.

The Irish Fiscal Advisory Council has made clear that it believes plans need to be reined in.

On the surface, it appears like we’ve really hit the ground running as we come out of the pandemic. However, there’s a temporary feel to this positive state of affairs, not least regarding the effects of the increase in our corporate tax rate. It will take a few years for us to really feel the bite of that, but we are still facing it.

In the US, the Federal Reserve recently said that it would soon be withdrawing some of the emergency financial support for the economy there, while the European Central Bank has begun similar discussions here. Rising inflation is being described as temporary, driven by things such as rising energy costs, but there are no guarantees that that is the case.

Our national debt is close to €250bn. We’ve had wonderfully low interest rates for a while, but the wind there may well change direction in the medium term with those inflation issues.

Of course, we are deserving after all we have been through. However, we already know to our cost what happens when we don’t put the financial breaks on. The best story told out of this budget would be a boring one, where no one has anything to shout from the rooftops, and the Government does what it has to in areas such as the climate agenda and housing, and a few other very carefully chosen areas.