Ciarán Casey: Lack of vision has wasted Ireland's unplanned tax windfall

The pageantry of Budget Day means that politicians will aim to avoid landmines, then go back to business as usual, writes Ciarán Casey

The cost of building houses has soared across the developed world. File picture

IRELAND’S well-documented corporation tax windfall has totalled €156bn over the past decade.

This was entirely unplanned and was driven by changes to the global tax rules that inadvertently benefited us out of all proportion. 

Roughly a third has been spent reasonably sensibly on things such as supports during covid and investments in long-term savings vehicles. 

The rest, with grim predictability, has disappeared into the fiscal abyss.

Both the Department of Finance and the Fiscal Advisory Council have been sounding the appropriate warnings throughout: these windfall receipts are temporary and without them we would be in deficit. 

For those who remember it all too well, this will all feel uncomfortably like 2008. But sustainability aside, it is deeply troubling that Ireland has wasted such a massive stroke of luck.

Budgets are fundamentally political exercises. Politicians, civil servants and the Organisation for Economic Co-operation and Development have all criticised the way Ireland does them, but the pageantry around “ Budget Day” has remained stubbornly persistent. 

This made sense a generation ago, when incremental increases to the weekly pension or income tax cuts still made a significant impact on peoples’ lives. 

One of the paradoxes of living in a far richer country is that these small changes now have far less effect.

Any calls for fiscal restraint will be met with objections that there is a cost-of-living crisis, and many people are struggling. 

These are entirely valid. But we need to stop and wonder why things remain difficult in a country that is ostensibly so rich. We can alleviate the financial pressures on households in two ways. 

One option is to boost incomes, as we have always done. The problem here is in many instances we are all competing to buy the same things: if my income and yours both rise then prices often will as well.

Poorer people tend to spend a large proportion of their incomes on food, which can be imported. The supply is elastic, meaning if we all have more money we can collectively consume more of it. 

In a much richer country, we spend a bigger proportion of our money on services, which are largely domestically produced and in limited supply. 

Every time you recoil at the price of anything from childcare to dog grooming, this is exactly what you are running up against. The childminder or dog groomer is also living in an expensive country and needs to be paid accordingly.

Improving our collective wellbeing

This makes improving our collective wellbeing much more complicated than it was in the past. Instead of boosting incomes we would be far better off trying to address the underlying costs at the core of the problem. An obvious example is energy. 

Irish electricity prices are some of the highest in Europe, for both household and business customers. A major investment in offshore wind could permanently reduce costs, increase energy security, and help meet our emissions targets all in one go.

Making other cost savings is much more challenging. As everyone is too aware, house prices are like a runaway train. As in the last boom, government politicians are convinced that this can be fixed if they reach a housing output number that will be forever over the next hill. 

Opposition politicians dutifully criticise the Government for missing its own output targets, in the same mistaken belief that this is the crux of the issue.

In 2023, the Society of Chartered Surveyors Ireland estimated that the cost of building a new three-bed semi-detached house ranged from €353,896 in the North-West to €461,437 in the greater Dublin area.

Even more troublingly, the Dublin figure was a whopping €130,944 higher than in 2016, representing a 40% increase in seven years.

We could build a million houses next year, but unless we addressed the cost of building, it would help nobody.

There are no easy answers here, and it looks like the price increases are coming from every corner. But the reluctance of politicians of any hue to identify the core problem as one of building costs rather than the number of houses built has been extraordinary. 

We have been here before: around the millennium, policymakers tied themselves in knots to produce ever more houses in the false hope that it would drive down prices.

The most disturbing element of all this is that we have not even begun to ask the right questions. 

Instead, we will talk about housing output and missed targets for years before realising, yet again, that it has not achieved the desired outcome when we get there. 

Instead, we should be talking about costs, and why we could build things relatively cheaply in the past but seem incapable today.

House prices soaring across the world

Anyone who follows the news from abroad will recognise we are far from alone, and house prices are soaring across the developed world. 

The prices of imported inputs such as cement and steel are beyond our control, and the labour supply is severely limited. But it would be much more comforting if this was the level of the public debate. 

It is difficult to know how we will ever address our core problems when the discussion never leaves the starting block.

Ministers and senior civil servants work far harder than most people will ever realise, and for very little thanks. This is a problem in itself. The electorate still rewards and punishes politicians based on who turns up and says what we want to hear. These political incentives restrict what is discussed, the time policymakers get to reflect, and, crucially, their time horizons.

On October 7, the budget will be announced, and experts will pile in to parse over what was generous or as expected. 

Ciarán Casey: 'We cannot continue to ignore the important issues. It cannot just be business as usual after Budget Day.'

Opposition politicians will decry the misery of what was omitted, even if just to go through the motions. We will all spend two days hearing about something moronic, like mobile phone pouches for schools, that represents a miniscule fraction of total spending.

In government buildings, the exercise will be deemed a success if it avoids any major political landmines. Then we will go back to doing exactly what we all did before.

People who follow how these things are done in other countries assure me that they have their own problems. Nonetheless, we should aspire to better. The budget process itself soaks up far too much time and effort, when most payments and taxes should really just be adjusted for inflation. 

Then, we could collectively think about a proper, multi-annual economic plan that will at least begin to tackle our real economic problems.

Ciarán Casey was Department of Finance Research Fellow from 2019-2022 and wrote ‘The Irish Department of Finance, 1959-1999'.