April 22, 2024

The era of throwing money around like Smarties on big projects has to stop – The Irish Times

The most notable thing about the news on the national children’s hospital this week was not that it was going to cost another €500 million. That was entirely predictable. No, what was most striking was how relaxed everyone was about throwing another half a billion into the pot. There was no public debate about where the money would come from, nor much interrogation of the Taoiseach’s statement about “this Government” not putting in more money, which may say more about the timing of the next general election than about the hospital finally coming in on its latest budget allocation of €2.2 billion.

In a State awash with cash, perhaps this insouciance is understandable. A surplus of more than €8 billion is pencilled in for this year for the public finances. In addition, there are already billions in the State reserves in various forms, including €30 billion held by the National Treasury Management Agency and €6 billion in a fund established by Paschal Donohoe when he was finance minister and due to be developed now by his successor Michael McGrath.

A sum of €500 million is not a drop in the ocean – but it won’t throw the public finances off track either. And not finishing the hospital is clearly not an option. So on we go, in the hope that the €9.5 billion Metrolink project – already subject to huge delays and multiplying cost estimates – will not face the same fate once it starts construction. The fitness of the planning system to deal with this kind of mega project is about to be tested and, if it jumps this hurdle, so is the ability to deliver it. The children’s hospital saga has clear messages in terms of planning, contracting and developing, even if trite political comments that “lessons will be learned” are not very convincing.

The ability to pay for these mega projects and accelerated State investment in housing – while also sharply increasing spending on running the State’s services – results from the strong growth in the economy and the boom in corporate tax payments. It is fair to conclude that Ireland’s financial base has moved decisively to a new level: total tax collected in 2015 was €43 billion and by last year this had more than doubled to €87 billion. Add in revenues from other sources, and the State has €100 billion to deploy each year.

Rather than the kind of dramatic slump in taxes seen during the financial crash, the bigger risk is of a slow squeeze over the next couple of years

This enormous bounty gives Ireland the opportunity to invest on an unprecedented scale. And while – correctly – there has been a lot of focus on the danger of a sharp fall-off in corporation tax – there has not been enough attention on a more prosaic risk. This is that growth in the economy and in tax revenue just slows, at precisely the time when the exchequer starts to face significant new bills from an ageing population and climate change. Rather than the kind of dramatic slump in taxes seen during the financial crash, the bigger risk is of a slow squeeze over the next couple of years.

We are hearing a lot of talk of a “technical recession”, with the European Commission estimating a fall in Irish GDP last year and revising down its growth forecasts for this year. Given the distortions of Irish GDP figures – and the ability of the economy in recent years to beat most forecasts – little enough attention is paid to this. Clearly the economy we all live in was not in “recession” last year. But under the bonnet there are clear signs that growth is, indeed, slowing and some concerns relating to the two main engines of the economy.

The long tail of Covid-19 and the surge in inflation is hitting the domestic business sector – talk to anyone running an SME and be prepared to get an earful about “costs”. Some, adding up the numbers, are wondering about their own survival prospects. Meanwhile in multinational-land, Ireland continues to win new foreign direct investment, but there are job losses as well as gains. And there is increased competition now for new investment, including from big EU countries such as Germany. The shortage of houses and problems in the provision of services such as energy and water are big issues. The huge tax contribution of these companies to tax revenues and employment will remain – but it would be unwise to bet on it continuing to increase at the pace we have seen in recent years.

And Ireland has been relying on this growth in corporation tax – and on the income tax coming from people employed in multinationals. This money is not going to stop flowing in, but its growth rate will slow in tandem with a decline in economic growth. And soon enough decisions such as allocating another €500 million to a big project start to look more consequential – and involve foregoing something elsewhere, or finding more tax, as opposed to just reaching down the back of the metaphorical sofa, as is the case at present.

As revolving ministers for finance and public spending, Paschal Donohoe and Michael McGrath have done a remarkable job of keeping the national finances in check. But pressure to spend more is relentless

The entire political debate now is founded on the ability to throw public money around like Smarties – to pay for big projects, give cash to households and businesses and so on. As the election approaches, the promises will pile up. But the Smarties may become scarcer.

As revolving ministers for finance and public spending, Paschal Donohoe and Michael McGrath have done a remarkable job of keeping the national finances in check. But pressure to spend more is relentless. In January, exchequer spending was running more than 16 per cent ahead of the same month last year, while taxes – after adjusting for a technical factor – were running around 6.5 per cent higher. Too much should not be read into one month’s figures, but the forecast surpluses will quickly be eaten into unless spending growth is reined in.

This doesn’t mean resorting to some kind of “do nothing” mindset. Ireland needs to invest massively – in housing, infrastructure, public transport, climate change and so on. The huge rise in the tax base gives the opportunity to do this. But as the public finances get tighter, questions about how to pay for the required level of investment – in part, inevitably, via higher taxes in some areas – and how to get much better at planning and delivery are set to become much sharper. Dealing with the resulting trade-offs will be the central debate in Irish politics in the years ahead.

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