John FitzGerald: The budget is now like a children’s party, with a prize for everyone

The key focus of budget day should be the Government plan for managing the economy over the coming year. Instead, all the focus is on what is in the budget for each individual or interest group, not whether the overall budgetary stance will leave the population as a whole better off.The budget is now like a children’s party where it is assumed that there will be a prize for everyone. The problem is that the prizes must be paid for by the recipients, and the cost may ultimately be much greater than the value of the prize itself. However, in the excitement of the day, it may be some time before the “winners” realise that the budget goodies were a costly mistake. Over the summer, the Department of Finance’s Tax Strategy Group papers set out the Government’s budget tax options. These papers take account of the recommendations in the Report of the Commission on Taxation and Welfare, but also set out a range of other options for Government. READ MORETo judge by the kites flown to date, the forthcoming budget is likely to ignore the commission’s recommendations, instead choosing new schemes and tax write-offs without reference to what would be best practice. [ Irish Times poll reveals what voters want in Budget 2027Opens in new window ]This piecemeal approach is what has given us 34 separate incentives for housing. While new measures may benefit some people, there’s the risk of serious side effects. New tax breaks are an expensive way to achieve often fuzzy objectives. Bitty tax measures are a far cry from a strategic approach to how public services are funded. In the interests of transparency, the budget speech should set out the rationale behind any deviation from the commission’s recommendations, which are to broaden rather than narrow the tax base. On the spending side, a recurring failure has been huge unplanned expenditures over budget day provisions. Although the level of total government expenditure as a share of national income has remained stable at about 40 per cent, well below the EU average, the unplanned nature of much of the outlay is the problem. If the spending overshoot that transpired had actually been part of a planned budget, the additional funding would probably have been allocated very differently, with greater social value. By spending beyond their estimates allocations, irresponsible departments and public bodies grab a disproportionate share of public funds, at the expense of other State priorities. It is welcome to see Minister for Health Jennifer Carroll MacNeill and her department take back control from HSE regions that have ignored the budget limits voted by the Dáil. Of course, as the Irish Fiscal Advisory Council has noted, sometimes overruns arise because the allocated budget fails to reflect the actual costs of delivering the particular service or readily foreseeable growth in demand due to demographics.[ Ministers warned of inflation risk as public spending overruns likely to top €1.4bnOpens in new window ]The Government’s commitment to infrastructural investment follows a clearer strategy. Guided by the recommendations of the Accelerating Infrastructure Report, the Coalition is taking action to speed implementation and reduce costs. Effective implementation is essential to allow the economy to continue to grow in a sustainable fashion.After the 2008 financial crash, State investment was drastically cut back to less than 3 per cent of national income. By 2019 it had been increased to 4 per cent of national income and this year it will probably be more than 5.5 per cent. Next year will probably see a further small rise as essential projects, such as the MetroLink, kick off. This is among the highest rates of public investment of any EU country, reflecting Ireland’s infrastructure deficit, due to the rapid growth in the economy and its population.All of the increase in investment is being funded out of taxation, in particular corporation tax. In this way, the corporation tax bonanza can earn a return in later years. Some of that return will be as dividends to the State, but in some areas, such as public transport, the main return will be in the form of better services for the public. The budget tables should set out the expected future yield from State investments. [ Ireland’s corporate tax advantage is over. So what’s the plan?Opens in new window ]The Government is now investing more than 2 per cent of national income in housing. If this is to be sustainable, it must be an investment that will yield future income for the State. The medium-term forecasts for revenue should include these potential dividends. The design of the support schemes for housing should take this into account. Where the household incomes of those in State-supported housing rise over time, so too should the return to the State. Any sell-off of public housing should be at full market value, enabling the funds to be recycled into future housing or other infrastructure.