The Government will issue a blunt warning to unions and employers’ groups next week that huge public spending on Covid will soon be reduced and future spending increases on pensions, healthcare and climate action will have to be financed by spending cuts or tax increases.
In papers circulated to stakeholders in advance of the National Economic Dialogue next week, the Department of Finance says that the Government "has pursued a counter-cyclical approach during the pandemic" by supporting the economy with massive deficit spending. But its adds: "to be effective, budgetary policy must be counter-cyclical during recovery".
“In other words, with the private sector recovery gaining momentum, it is necessary for public supports to be rolled back so as not to overheat the economy.”
The strong position from Department of Finance signals a fraught budget process to come as Ministers push for the high spending of the Covid era to continue, while the department urges spending should be pulled back.
The National Economic Dialogue, which includes two days of talks between unions, employers, stakeholders and Government on budgetary priorities starts on Monday.
Sessions will be addressed by the Taoiseach, Tánaiste, the Ministers for Finance and for Public Expenditure and other Ministers, and will be attended by community, voluntary and environmental groups as well as businesses, unions, research institutes and academics.
The Government papers issue the strongest warning yet of the need to pull back Covid spending and stabilise public finances as the pandemic recedes and economic recovery takes off.
They say that a strong economic recovery is expected in coming months. “Against this backdrop, it is important that budgetary policy does not add fuel to the flames. To put it simply, budgetary policy should lean ‘against the wind’.”
Officials say that public debt is now among the highest in the European Union, and on a per-capita basis stands at about €45,000 per person, one of the highest levels in the world. They also point out that the budget deficit in Ireland this year "will likely be among the highest in Europe".
European ‘pack’
The Government’s stated policy on debt and deficits has been to keep within the European “pack” and avoid becoming an outlier, which they fear would damage market confidence, and Ireland’s ability to borrow at rock-bottom rates. However, the papers reveal a fear that this strategy is beginning to slip.
“While staying within the pack of fellow EU member states was an essential target during the pandemic, it will be critical that Ireland does not start to drift to the fringes of this group,” officials warn.
“There is therefore a pressing impetus – economic, fiscal and legal – to restore the public finances to a sustainable trajectory,” they say.
They also say that the “significant expenditure pressures” in the future from an ageing population, the need to finance better healthcare, including through Sláintecare, and from climate action measures cannot be met through continued borrowing.
“If fiscal buffers are to be rebuilt and debt restored to a lower level, such additional expenditures will need to be financed, either through offsetting spending adjustments or increased revenue-raising,” the papers say.
The Department of Finance warnings come after a few weeks in which Government Ministers committed themselves to continuing Covid spending, supported by borrowing, for the rest of the year at least.
A recovery plan which contained €5 billion of spending pledges (some supported by European funding) was unveiled and the Taoiseach Micheál Martin suggested that the budget would include increases in welfare rates, to which the Tánaiste Leo Varadkar responded by suggesting a package of tax cuts could also be included.
Mr Varadkar also told his party’s ard fheis last weekend there should be wage increases, spending increases in health and tax cuts – announcements which raised eyebrows in the Department of Finance.
