Matt Cooper: Size clearly isn’t everything as second big spend budget falls flat with voters

In a budget loaded with warnings about the potential for things to go wrong in the global economy that could impact on us, it is remarkable that the Department of Finance has made such an optimistic forecast about the level of inflation it expects to pertain to 2024: 2.9 per cent.

Remarkable, because the underlying assumption of the budget – that it will make most people better off – is based on that level of inflation being achieved.

“That (inflation number) is the basis of our budget and our economic forecasts,” Minister for Finance, Michael McGrath, told me when I interviewed him on The Last Word on Tuesday afternoon and pressed him on his earlier budget statement – “I expect living standards will improve for the vast majority in the next 12 months, with incomes growing faster than the rate of inflation.”

“On average we believe incomes will rise by between 4 and 5 per cent next year,” he told me, before reeling off many of the measures, across income tax changes, social welfare increases and one-off payments designed to help people with the rising cost of living.

“I think when you look at the distribution of the various measures in the budget . . . the overwhelming majority of people will be better off,” he said. And he referred to making real gains, because most people have experienced a step-back in living standards over the last 18 months.

But what happens if inflation is more than 2.9 per cent? Many economists have argued that the budget measures are themselves inflationary, but what else could the government do when voters expect budgets not just to plan for the longer term, but to provide them with immediate relief from their own financial pressures?

A government running major surpluses of revenues over spending could not be seen to turn away from the immediate financial needs of many voters. Yet it perhaps needed to be more flexible in the projections upon which it relies: most reliable budgets are worked across a range of potential inputs and outcomes, not plumping for just one.

International events could make the inflation projection redundant. The humanitarian crisis resulting from the terrorist attack on Israel last Saturday is the world’s main concern; however, the looming war will have its economic consequences too.

As we know only too well from what happened after Russia invaded Ukraine, oil prices have a major impact on electricity and gas prices – and on the price of a litre of petrol and diesel.

Some of us are old enough to remember the Oil Crisis of the 1970s, when supplies of oil dropped dramatically and prices shot up. Some of my own childhood memories are of the long queues at petrol stations as motorists sought to fill their tanks. That all happened because of the October 1973 Israeli-Arab war that followed a shock attack on Israel from Egypt and Syria.

All the indications are that Israel, shocked rightly at the terrorist attack by Hamas last weekend, is responding disproportionately to the outrage and that this has the potential to create enormous geopolitical instability in a major oil-producing region.

The Irish economy may have weathered the consequences of Brexit, the pandemic and the Russian invasion of Ukraine extraordinary well, for which the post-2016 governments can claim credit legitimately, but there is a danger of our luck running out, as McGrath noted in his budget speech.

“Our key export markets are experiencing an economic slowdown, and this has impacted on our recent export performance,” he said.

“While the Irish economy is in a strong position today, I am all too aware of the potential risks that may materialise from global events or sectoral shocks ...

“Sovereign borrowing costs have been on an upward trajectory and have, in recent days, risen to levels not seen in over a decade as markets appear to be absorbing ‘the higher for longer’ message coming from global central banks. The Irish 10-year yield is currently 3.3 per cent, considerably higher than this time last year.”

Also, the government has reason to worry that the extraordinary gathering of unexpected corporation tax increases may be coming to an end – the August and September revenues falling below expectations.

The overall anticipated tax take is now €88.3 billion for 2023 – still enough to produce a major surplus, but just not as good as had been expected.

Economic forecasting is an inexact science, at best, but the Department of Finance has not distinguished itself in the field this century.

It made its April projections of €65 billion in surpluses of revenues over spending between now and 2026 – a pot of gold from which we could draw to make valuable investments. A surprising claim, but one which was seized upon politically.

Quietly, that optimism has dimmed and the forecast is now down to €46 billion. It is a very dramatic revision, albeit one made very quietly.

It is also notable that both the Irish Fiscal Advisory Council (Ifac) and Central Bank have expressed their reservations about the €14 billion package of extra spending and tax cuts announced on Tuesday.

Ifac, which told the government prior to the budget that there was “little justification for further temporary measures”, believes that number is a “serious cause for concern” and that it will keep inflation “higher for longer”.

Damningly, it worries that this government “repeats past mistakes” and that its future plans are “less credible”. In particular, it notes how spending overruns for health this year had not been factored into the budget.

It also warned that it is unclear how a new public sector pay deal will affect the budget balance.

Meanwhile, Central Bank of Ireland governor Gabriel Makhlouf has not just highlighted the inflationary impact, but warned it may risk damaging investment in the country.

“The risk is that expansionary fiscal policy adds to demand, essentially pushing back on what monetary policy has been doing, and allows inflation to continue, if not increase,” Makhlouf said, noting that Ireland’s unemployment rate is at its lowest in 20 years and the economy is operating at full capacity.

But by the same token he could have acknowledged that future investment may be dependent on an upgrading of our infrastructure and on the provision of adequate housing. Both may be very difficult to deliver because of capacity constraints and lead to rising costs if attempted, but equally have to be done.

A definite failure to excite

If the economists are cross with the government for its €14 billion spending gamble, then it is extraordinary that the budget did not have a single attention-grabbing headline detail that made people talk or swoon.

Members of Fianna Fáil, Fine Gael and the Greens might well be angry that what was announced wasn’t ambitious enough – or sufficiently well-messaged – to give them any political benefit.

Any budget should bring immediate short-term political benefits and then medium-term ones. It has likely failed the immediate priority: what voters were texting each other excitedly about on Tuesday or talking about over coffee on Wednesday – what were they getting out of the budget to make things better for them?

This general apathy is likely to be reflected in the forthcoming opinion polls, when any bounce for the government parties – if there is any bounce – may be marginal at best.

The government didn’t seem to learn from last year, when its €11 billion package – then the biggest in the history of the state – did nothing to push up opinion poll ratings in the aftermath.

Sometimes, governments look for a more enduring long-term benefit from a budget, believing it comes from January onwards when tax improvements leave more money in people’s pockets, or they receive state-supplied financial supports.

But if the three €200 gifts towards energy bills last year did not receive the anticipated levels of gratitude, then three €150 subsidies – more than had been anticipated – is unlikely to excite many floating voters.

As for income tax, voters may say they want increased government spending rather than fewer tax demands, but increasing the personal, employee PAYE and earned income tax credits by €100 each is not a headline grabber; nor is increasing the standard rate income tax cut-off point of €2,000 to bring entry to the higher rate of income tax to €42,000.

As for the USC, it is clear that the once temporary or emergency tax is with us permanently, the government delighting in the €5.5 billion of revenue it pulls in. It is surrendering €400 million of that by reducing the 4.5 per cent rate of USC to 4 per cent – the first time there has been a reduction of USC rates since 2018 – and raising the entry threshold to €25,760. But such a minimal change to the USC hardly butters many spuds.

It is likely that McGrath felt the ghosts of 21st century Fianna Fáil finance ministers past looming over his shoulder last Tuesday.

Charlie McCreevy has become a watchword for cavalier wastefulness – “when I have it I’ll spend it” – Brian Cowen for complacent inattention and the late Brian Lenihan for the imposition of what came to be known as austerity. He made reference only to Lenihan.

McGrath had to combine generosity with apparent frugality – a tough balancing act. To establish his credentials on the latter, he can point to the establishment of two major funds into which money will be poured over the next decade, hopefully providing us with a €100 billion-plus buffer to help an ageing population.

Whether or not that money should be spent earlier instead of saved is another argument, although to try to do so earlier would be to risk adding to inflation.

None of this is easy, but while McGrath can claim to have been a safer pair of hands than his 21st century Fianna Fáil predecessors, the lack of excitement in the distribution of such an enormous and risky sum of money suggests a political failure as much as an economic danger.