Daniel McConnell: Prudent Paschal must resist any pressure to loosen the purse strings

It is some trick, to be able to increase spending by a whopping €3.4bn in one year and still be able to claim to be prudent, writes Daniel McConnell. 

This is on top of similar increases in spending over the past three years.

But this exactly what Finance Minister Paschal Donohoe is seeking to do.

Yesterday saw the publication of his summer economic statement (SES) which as he said sets out the broad framework of what Budget 2019 will look like come October.

Donohoe, as finance minister, is in the kind of dream land that predecessors like Brian Lenihan and Michael Noonan could have only longed for.

An economy with near full employment, growing at over 5% a year, and coffers bulging at the seams is a far cry from the dire budgets of 2008, 2009, 2010 and 2011 where billions in cuts were introduced.

Donohoe is at pains to make it clear that he will not do anything reckless which would see the mistakes of a decade ago be repeated.

Donohoe also revealed he is to forgo spending €900m in the upcoming budget allowed for under the EU fiscal rules. To spend that money, he said, would be inappropriate, given how strong the economy is growing at present.

This would increase the deficit by an additional 0.3% of GDP and would represent the “the wrong choice for the economy at this stage of the cycle”, he said.

The minister’s caution is well founded.

We have had a chorus of warning calls from the ESRI, the Irish Fiscal Advisory Council, the IMF, the EU and others about the risk’s to the economy overheating.

Donohoe himself, in the document he published yesterday, highlighted the risk of overheating as one of the key dangers facing his otherwise rosey picture.

Out of the €3.4bn increase in spending, Donohoe made clear that €2.6bn of it has already been committed.

This is largely related to increase in capital spending, the public sector pay deal, and some social welfare payment increases.

That leaves €800m to be fought over by ministers in the run up to the budget.

Well that is, if Donohoe’s “Dear Prudence” message is to be sustained.

However, if there is not an election before the budget, as is possible, then there will be one shortly afterwards.

So, this is likely to be an election budget.

If that is the case, Donohoe will come under severe pressure from all sides to loosen the coffers.

The test will be to see how much of that €900m he is choosing not to spend is intact the morning after the budget.

Donohoe is a steely operator and his friendly demeanour often belies his determination once his mind is made up.

He has set his stall out as the slow and steady hand on the tiller, as opposed to the champagne-swilling free spirit that was Charlie McCreevy, who was the king of the giveaway budgets in the early 2000s.

But, come the late days of September and early October, when budget kite flying will be at its peak, Donohoe’s steel will be severely tested.

Despite all the warnings from the various economic groups, it is amazing that so many within the political system are willing to ignore them.

Blinded by their short-term political obsessions about their own positions, TDs by repeatedly calling for more and more money to be spent, show they have no real regard for the country’s greater good.

Even the highly cautious and prudent Paschal Donohoe will face his greatest test to ensure he does not relent to the inevitable pressure to loosen the purse strings.

Let’s hope he is up to the task.