On October 13, Ireland unveiled its latest Budget, which was historic in more ways than one. Up until very recently, it would have been hard to imagine two ministers from the two biggest political rivals in the history of the State, standing up together to deliver a unified Budget. On top of that, the package delivered of almost €18bn was the biggest in the country’s history, with the vast, vast bulk of it coming in spending measures and less than €300m net in taxation changes. Budget 2021 was framed on two key assumptions: (1) no vaccine is found for Covid-19 before end 2021 and (2) a disorderly end to the transition period between the UK and EU. Essentially it was prepared against a background of extraordinary uncertainty regarding near-term economic and fiscal prospects. The baseline scenario is one in which economic activity increases only modestly next year, with a General Government deficit of the order €20½bn in prospect. The Department of Finance has had a tendency of under-promising and over-delivering ever since the Financial Crisis, and it will be hoping for a similar result in 2021. But the reality is that whatever happens in relation to Covid-19 and Brexit is very much outside of its control.
Although there is a lot of borrowing involved in Budget 2021, it’s important to remember this is being done so cheaply that no austerity is required to pay for it, well at least not in the near-term. Eurozone interest rates remain at record lows and it is hard to imagine a catalyst in the immediate future, and as long as the European Central Bank is offering endless monetary support to the bond market, where things might change dramatically on the interest-rate front. As such, some would argue that Ireland should have spent more in the fiscal package given the benign interest-rate environment and since there are no bond redemptions next year. However, nothing in life should be taken for granted as 2020 has shown us on both the health and economic fronts, and at the end of the day, borrowings still have to be paid back.
Politicians by their nature find it easy to give things away but difficult to take them back. And therein lies the big worry. Increased numbers in front-line public service staff, as promised in this latest Budget will raise the fixed cost to the Exchequer/taxpayer going forward, which will more than likely mean higher taxes down the road. Carbon taxes will continue to go up in the coming years and an increase in property taxes is inevitable in my view. The big question is what happens on the income tax and corporation tax fronts, with EU moves towards a digital tax and tax harmonisation, in general, having a bearing on the latter. Recommendations from a new Commission on Taxation here at home may also play a major part in the decision making process over the next few years. Income tax receipts have held up very well this year all things considered, but that’s more a reflection of the fact that lower-income workers have been the biggest economic losers as a result of the shutdown in the economy. Support measures should therefore be geared towards helping those who are less well off. However, the bottom line is that the largesse in Budget 2021 will have to be paid for down the road, and while stronger economic growth post the pandemic should help ease the burden to a degree, there will, unfortunately, be some pain to the taxpayer.
Meanwhile, on the expenditure front, hiring more numbers won’t make the public service more efficient, it is all about hiring the right people. You don’t need 10 extra workers if you can find the right five who can do double the work at the same speed and cost and with more quality. Key spending Departments have seen huge increases in their allocation for next year. The Department of Housing will get €5.2bn with a promise of 12,750 new homes, while the Department of Health will get an additional €4bn with dedicated funding for cancer care, maternity services, not to mention extra consultants and 20 extra ICU beds. Much of this increase in investment in public services was something that was called for well before the pandemic struck. During the February General Election, there was a call for more State action in the areas of health and housing. The expectation from citizens that the State will act in certain areas has grown since the pandemic and it is likely that these big increases in public spending will endure beyond Covid-19, even more so if Sinn Fein gets into power after the next election, which still remains a real possibility. Interestingly, one unnamed Government Minister, who was quoted on the newswires in the aftermath of Budget 2021 said that the HSE would spend its increased allocation of funds with little bother, but probably not on what it is intended for. I find it hard to disagree with that opinion.
The Budget also put in place a €3.4bn recovery fund, which will more than likely be used for ongoing wage support subsidies from the State if severe lockdown measures are still ongoing during 2021. The new fiscal package also delivered on support measures for businesses and for the sectors most badly hit by the closing of the economy, namely the restaurant/hospitality and arts/entertainment areas. The VAT rate for the tourism industry has been cut from 13.5% to 9% from November 1 this year to December 31, 2021, and while some may argue that a VAT rebate rather than a VAT cut would have been more beneficial, it is hard to be over-critical of the scale of the package introduced by the Fine Gael, Fianna Fail, and Green Party coalition at this extremely difficult time.
The underlying tone of Finance Minister Paschal Donohoe while delivering his speech was one of hope rather than optimism, and he concluded it with a quote from the late Irish poet Seamus Heaney, “if we can Winter this one out, we can Summer anywhere”. Fingers crossed, he is right for all our sakes.
Author: Alan McQuaid is a leading economist and media commentator in Ireland. He has worked with the Department of Finance and the leading Irish stockbroking companies.