As we move out of the era of austerity, the Government now has more options as it presents its budget. The extent of the turnaround in economic growth – a central factor in the improving budgetary trends – has been surprising. For the first time in many years the budget measures will actually increase borrowing from the pre-budget position, rather than aiming to cut the deficit via lower spending and higher taxes.
The key question with today’s budget is whether it is driven by a coherent strategy for the public finances, or by short-term political pressures. To some extent, of course, it will be a mix of the two. There is no suggestion that the Government is going to throw caution to the wind. However it is clear that political factors are at play, for example in the likely granting of tax relief to offset some of the cost of water charges.
The danger comes in playing too much to the political agenda, particularly as the next general election starts to come into view. There will probably be one more Budget before the next election. But it takes time for people to feel the benefit of Budget measures in their pockets, and so, politically, today is a big day for both Fine Gael and Labour.
In terms of the overall budgetary stance, there are reasons to be cautious. The surge in economic growth is recent, and could be upset by international factors, notably the poor performance of the core euro zone economies. There is a strong argument for keeping a buffer in the public finances in case things do not work out as planned. Above all, this budget needs to promote stability. If within this it can start to improve the structure of spending and tax then so much the better. More investment in social housing, for example, seems a sensible move. The huge increases in taxation in recent years have also left significant problems, particularly as they impose a high income tax rate on people on relatively low incomes.
Yet all this has to be underpinned by the reality that the old days of generous budget packages are gone. We are now talking about reform, not giveaways. There is, of course, much scope to argue about where and how the State should spend money and raise tax. Significant improvements can still be made in getting value for the money we spend and the tax system has its share of unfairness and inefficiency. However a mindset shift is vital. Much of the lobbying of the Government in advance of the budget has shown little appreciation that the world has changed.
If the Government does not present its budget – and its medium term plan – within a clear strategy, then it will leave itself open to more and more of these demands, which will grow more strident as the recovery gains pace. And this strategy needs to go beyond just winning the next general election.