Budgetary announcements tend to be rather dull affairs. The content is usually flagged in advance and the changes typically flow from an existing policy tack albeit with some tinkering to reflect what’s happened in the interim.
The Department of Finance’s latest summer economic statement – dropped into the ether late on Wednesday after a serious Cabinet wrangle over government spending – was an exception to the rule. It marked a sea change in the Coalition’s budgetary stance.
As recently as three months ago, Minister for Finance Paschal Donohoe had signalled that the Government would aim to achieve a balanced budget by 2025.
In the stability programme update, a budgetary document submitted to the European Commission in April, he had pencilled in an €800 million deficit for 2025 – for all intents and purposes a balanced budget.
The summer statement, however, sets the State on an entirely different flight plan, envisaging a sequence of much bigger deficits between now and 2025, culminating in a budget deficit of €7.4 billion in 2025, €6.5 billion more than the original target.
The Government also signalled it would borrow an additional €18.8 billion over the next five years.
The announcement was quickly followed by a statement from the National Treasury Management Agency (NTMA), the State's debt management agency, alerting markets and creditors that it was amending its 2021 funding range to take account of the Government's new budgetary position. Something had radically altered in the body politic.
Donohoe has been hammering home the point that, while running big budget deficits has been necessary to support the economy during the pandemic, there is now a need to impose some budgetary discipline. He continually makes the point that budgetary discipline prior to the pandemic is what has allowed the big crisis spend.
Now he’s pivoting, not in the opposition direction, but in a different direction. So who cares? Budgetary arithmetic, the fiscal space, this is the dry part of the news cycle. Not so in this case, it goes to the very heart of politics.
Byelection shockwaves
The shifting budgetary sands are directly linked to the housing crisis and the likely political fallout awaiting coalition parties if the dynamic doesn’t change. This was perhaps driven home by Fianna Fáil’s poor result in the recent Dublin Bay South byelection.
The result sent shockwaves through Fianna Fáil and has triggered a major row within the Cabinet over the level of future government spending, and in particular the funds available for the Government's soon-to-be-published housing-for-all strategy.
Donohoe and Minister for Public Expenditure Michael McGrath are advocating fiscal moderation while Taoiseach Micheál Martin and Tánaiste Leo Varadkar are seeking additional funds to tackle the issue and staunch the political bleed: an unusual cross-party clash between Ministers and current and former taoisigh.
It’s difficult to pinpoint where the additional spending and borrowing laid down in the summer economic statement is going. But the Government is ramping up its capital budget – which covers the housing budget – from €9.8 billion this year to €13.4 billion by 2025. The Government’s capital spend fell to as low as €3.4 billion in 2013.
The Irish Fiscal Advisory Council – the State's budgetary watchdog – has raised concerns about the new projections, in particular the larger deficits and the slower pace of debt reduction.
Ireland’s national debt will swell to €280 billion by 2025, equating to 106 per cent of modified gross national income (GNI*), one of the highest debt levels in the world on a per capita basis.
Return of Piigs
Donohoe has stated he wants to keep Ireland in the middle of the pack financially, in keeping with its semi-core status in the euro zone bond markets. This sort of debt level, however, places us back with the Piigs, the offensive acronym given to Portugal, Italy, Ireland, Greece and Spain in wake of the 2010 euro zone debt crisis.
Ifac’s point is that the Government needs to be in a position to support the economy – as it is doing now – when the next crisis hits. Higher debt and deficit levels could make that more challenging.
The Government, of course, has to balance this fiscal imperative with a very pressing domestic issue – housing – one that is currently undermining its political standing.
We haven’t had the anti-globalisation politics seen in other countries, the reversion to nation-state rhetoric, the anti-immigrant movements. But the inequality agenda which fuels much of it has begun to manifest itself and housing is one of the key issues.
Sinn Féin's nationalist, republican agenda only brought it so far, its trenchant critique of the Government's housing policy now has it on the brink of government. It outpolled both Fine Gael and Fianna Fáil at the last election – a result that would have been unthinkable five years ago.
The Government’s previous housing strategy – Rebuilding Ireland – has entirely failed to change the dynamic on housing and will in the coming weeks be replaced by the new housing-for-all strategy. Funding this has seemingly trumped Donohoe’s balanced-budget objective.
