It turns out there is money to spend after all. After months of lowering expectations about what more the Government could do to help households cope with inflation, the Department of Finance is now “revising the fiscal parameters” and making an additional €6.7bn available, mostly for next year’s “cost-of-living budget”.
An extraordinary recovery in the post-pandemic public finances has enabled Finance Minister Paschal Donohoe to again intervene in the domestic economy to achieve specific policy goals.
Where two years ago that meant greenlighting unknown billions in business supports and pandemic unemployment payments, today it’s adapting expenditure growth to the reality of inflation.
So, there will be a little more than €1bn in tax adjustments, an extra €1.7bn in core spending to take account of higher prices and greater needs, and €4.5bn in contingency funds for whatever is coming over the horizon.
The normalisation of rainy-day money in the budget process is probably one of the better lasting changes from the Covid-19 crisis.
At a time when the Government is dealing with challenges on multiple fronts – an energy shock, runaway consumer prices, trouble in Brexitland – it makes good sense to rely on fiscal buffers that help manage hard-to-quantify problems.
If you need the cash, it’ll be there. If not, your prudence has produced a nice windfall.
That’s what has already happened in 2022. The €7.5bn in contingency, or non-core, spending really isn’t required this year.
In fact, there is already a €4.2bn surplus at the halfway point due to much higher-than-expected tax receipts and lower spending.
Tax revenue is up 25pc on the same period last year as corporation tax, income tax and VAT roll in on the back of a strong snap-back recovery.
Meanwhile, total spending is down €1.6bn, mostly because of significantly lower social protection outgoings.
The big items we didn’t have to cover were mainly associated with Covid: PUP, wage subsidies and health spending.
The fact that the Government spent lavishly on those items during the pandemic, though, is arguably what set us up to be able to face this next crisis with financial confidence.
The €48bn in tax measures, spending and loans the Government made available during Covid supported the record employment, consumer spending and corporate profits that are driving a strong economy.
And that economy has produced the fiscal space to act.
However, although the state of both the economy and the public finances provide reasons for confidence, there are two key differences to note between then and now: the economic context and the fiscal context.
While Ireland’s growth is strong, its momentum is slowing. In fact, there was a small dip in domestic demand earlier in the year and most economists are revising down their forecasts from gangbusters to merely strong. And the imbalances between recovering demand and supply shortages are not likely to be resolved soon.
On the fiscal side, we can still expect a tax surplus of up to 0.5pc of GDP by the end of the year. That’s more than €2bn.
But there is tension between fiscal demands for more spending and monetary policy, which is about stabilising prices.
Whereas before the State was replacing lost income due to lockdowns, now the goal is to help people deal with rapid increases in consumer prices, especially in the energy sector.
But it’s happening against a backdrop of rising interest rates and increasing Government borrowing costs.
In reality, Ireland’s fiscal position is very strong. The State has large cash balances, and yields on Government bonds are historically pretty low. Market access is not a problem as it was in 2011.
The real test will come when one of the pillars – corporate taxes, household savings – gets wobbly. That’s when the contingency planning will prove its worth.