The release this week of pre-budget numbers in the Summer Economic Statement is just the first in a long battle over how to respond to the cost of living crisis. Get ready for a summer full of clues about what the government might do – Ministers will face two lanes at once, promising us they are paying attention to public finances while simultaneously pledging to deliver help everywhere. Behind this battle lies an unanswered question: how long will this inflationary surge last and what will things look like this time next year?
Politically, this is essential, for the following reason. The state coffers are overflowing with money. For the moment. So there will be strong pressure to spend money later this year on what will be presented as one-off measures. Choose from a special autumn bonus for all social recipients; another energy credit for all households on the model of the €200 credit paid at the start of the year; more one-time payments to poorer households who qualify for the fuel allowance, and so on. There will be no end of other ideas to come, given the surplus of 4.2 billion euros recorded in the first half of this year.
Apart from energy credit, which wastes too much by giving money to many households that don’t need it, we can plead the cause of all this. And it’s clear that low-income people need and must get help, given the massive surge in inflation. The political – and economic – problem is whether this aid is truly “one-off” or whether we will still face higher inflation for much of next year. Nobody knows, of course. But there are clear threats to Russia’s gas supply this winter, which could push prices up sharply again. And it’s hard to see inflation returning to safe pasture by around 2% or 3% any time soon.
As the cost of living crisis continues, there will be strong pressure to maintain higher spending next year. At the beginning of 2023, the pressure would again be on to repeat the “temporary” measures from the end of 2022. Otherwise, people who received ad hoc support this year would be worse off next year. If the inflation rate is still high, you can see the problem. The introduction of significant new temporary measures in 2023 would effectively render absurd the revised commitment to keep spending growth below 6.5% next year. Forget the 2023 budget for now – the first battles will be over how much extra money to spend this year.
There is money around. But the big problem is the extraordinary increase in Ireland’s reliance on corporation tax from a few large corporations as a source of revenue. One in eight euros of all tax revenue comes from corporation tax paid by just 10 companies and, along with their employees, they also pay a good chunk of income tax, USC, PRSI and VAT. The increase in corporate tax payments over the past year alone represents 3 billion euros of the 4.2 billion budget surplus in the first half. Go back to pre-pandemic corporate tax levels and the annual deficit could reach 7 billion euros, all other things being equal.
This flood of money gives Ireland valuable options. But as what could be a kind of global recession approaches, Ireland is exposed to the profits and tax structures of, say, a dozen major US corporations and the decisions made on their boards. The challenge of money management is to use that money wisely without relying on it to support ongoing day-to-day commitments. Economically, there are good reasons to set some aside in a special fund, available perhaps to mitigate future economic shocks, or as a fund for special capital investments.
Politically, of course, the problem with planning a rainy day fund is that the opposition will say it is already raining. And Sinn Féin pressure in particular effectively defines the terrain on which many of today’s battles are fought.
Paschal Donohoe and Michael McGrath are, we assume, trying to get their colleagues to make the necessary compromises to deal with a cost of living crisis that may be with us, in what we might call a crisis phase, for some years . Dealing with it requires two decisions: where and how to allocate resources and, importantly, what that means for tax levels and spending elsewhere.
Politicians have no problem proposing ideas under the first heading, but will try to avoid dealing with the tax and expenditure implications elsewhere. Helping people who need help – and that can take a few years – requires targeted action and the ability to spend elsewhere. It comes at a time when population aging and climate change are already making the case for higher tax levels.
If the government rolls out a whole host of new spending programs on the basis that corporate tax revenues are a one-way bet – in the right direction – then they’re betting the farm on the decisions around a few water coolers in Silicon Valley. And history shows how quickly public finances can turn around if a hit to growth is combined with a sharp drop in a key source of revenue, as happened during the financial crash when property taxes fell. are collapsed.
The challenge for Irish politics is to try to address the cost of living crisis while removing the corporate tax scum from the equation. Resisting calls to bring the budget forward in the summer only increases the pressure in the fall. The risk to government is seen as doing too little now when there is plenty of cash. This will cause squabbles within the Dáil for months to come, but they will be nothing compared to the fighting within the government over what to do.