Finance Minister Michael McGrath and Public Expenditure Minister Paschal Donohoe have been cautioned by the Central Bank and the Irish Fiscal Advisory Council (Ifac) about the risks of providing excessive stimulus in Budget 2024 to an economy that is already growing at a healthy pace. However, it is expected that these warnings will be largely ignored due to political considerations outweighing economic prudence. Ireland has a history of implementing pro-cyclical fiscal policies rather than counter-cyclical ones.
The upcoming budget, which will be the second-last before the general election in February 2025, is likely to face criticism from opposition spokespeople who will argue for even greater spending. Finance Minister Michael McGrath has stated that the package will be €6.4 billion, with €1.1 billion in taxation measures and just over €5.2 billion in core expenditure. This would result in net core spending growth of 6.1%, exceeding the government’s original expenditure target of 5% in its medium-term fiscal strategy.
The justification for this increase in spending is the ongoing pressures of cost-of-living and cost-of-doing-business, which have not abated. Inflation, as measured by the EU harmonized index, rose to an annual rate of 5% in September. Energy prices increased by 3.7% and food prices increased by 0.4% during the month. Additionally, crude oil prices have risen by almost 33% since the end of June, further adding to the cost pressures faced by households and businesses.
In addition to the €6.4 billion package, there will be additional once-off supports to assist with the cost of living and doing business. While bodies like Ifac and the Central Bank may criticize the package, elected representatives have to operate within the realm of real politics. With Sinn Féin gaining strength in the polls, Budget 2024 will be driven by the political imperative to sway voters. However, it is unlikely that any budgetary package, regardless of its size, will significantly impact the polls, as housing remains the primary concern for younger voters. The government’s progress in addressing the housing crisis has been underwhelming, and it has not been given the urgency it deserves.
Budget 2024 is expected to follow a scattergun approach to economic policy, offering small benefits to various sectors of society. While most individuals will wake up the next morning slightly better off, no one will experience a significant improvement. This lack of a longer-term strategic focus is a common feature of budgets, as the politics of a democratic system prioritize short-term thinking over long-term planning. Unfortunately, politicians rarely extend their vision beyond the next election.
This week, the National Competitiveness and Productivity Council identified four strategic challenges for Ireland: reducing the cost of doing business, improving infrastructure planning and development, accelerating progress towards climate targets, and promoting research, development, and innovation for stronger productivity growth. These challenges should guide fiscal policy, but it is unlikely that they will. It is important to be cautious about wasting scarce resources in the face of a potentially challenging global outlook.