Notes on the Front

The Government’s fiscal policy is high risk to the point of irresponsibility.  The recently published Summer Economic Statement (SES) attempts to mask this.  According to the  Irish Fiscal Advisory Council (IFAC):

“Excluding windfall corporation tax receipts, the Government is forecasting a budget deficit of almost €11 billion next year,” the watchdog said, noting that this equates to 3.2 per cent GNI*. “This is despite a strong economy.”

An economic deficit of €11 billion: a commentator from Mars might speculate that the Irish economy was in a recession or severe slump.  But we’re not – just the opposite. We’re at the top of the business cycle.

 The only way we escape the normal consequences of this economic deficit (e.g. borrowing, rising interest rates, increased interest payments, higher debt) is the magic beans* of windfall corporate tax receipts.  This is the money that a handful of US multi-nationals pay in tax due to their tax avoidance strategies. 

Leave aside the impact on prices – running an economic deficit when the economy is close to full capacity can only fuel inflation.  There are serious implications for fiscal policy. 

First, we are becoming more reliant on windfall corporate tax receipts at a time when those receipts are projected to fall. 

• In October last year, the Government projected windfall corporate tax receipts to be €15.3 billion in 2026. In May of this year, they revised this figure down to €13.1 billion.

At the same time, the economic deficit is rising – that is, the deficit excluding the magic beans of windfall corporate tax receipts:

• In October last year, the Government projected the economic deficit to be €6.9 billion in 2026. IFAC now projects that deficit to rise to nearly €11 billion.

We are increasingly reliant on a shrinking pool of money: what could possibly go wrong?

A second problem is that we have an upside-down fiscal policy.  The Government has failed to learn the lessons of the austerity period.  Minister Paschal Donohoe outlined the logic of a counter-cyclical policy:

“Government is continuing to run budgetary surpluses in good times so that, if the economy takes a turn for the worse, we have the fiscal firepower to respond in a counter-cyclical manner, supporting incomes and employment.”

The principle is correct – save in good times, spend in bad.  However, this is exactly what the Government is not doing.  From the Fiscal Council:

‘IFAC also took aim at how the Government warned that if there is a deterioration in the international tariffs landscape, the 2026 budget package would be smaller.  “This is exactly the opposite of standard economic advice. Countercyclical policy means giving more support when the economy is weak and less when it is strong.”

Dr. Emma Howard of TU Dublin put it well on RTE:

“The Government has been running . . . a pro-cyclical fiscal policy.  They have been increasing spending and pumping money into the economy when we had a really strong economy.  And now what they’re saying is that if we have tariffs that are going to be damaging and reduce economic growth and employment, [the Government will] reduce spending in response.  Which is in fact the exact opposite of what we should be doing when we have a shock . . . they have dug themselves into this hole of pro-cyclical spending . . .’

The Government has said it will ‘revisit’ the projected spending increases and tax cuts if growth is hit by tariffs.  This risks driving down growth even further, necessitating (according to the Government’s logic) further fiscal consolidation and so on and so forth.  This is the pro-cyclical trap.

The Summer Economic Statement provides little data for us to investigate the implications of a rising economic deficit, declining corporate tax receipts and the implicit pro-cyclical policy implications.  Further, the SES was prepared on a no-tariff basis.  There were no alternative scenarios, especially the highly realistic one that there would tariffs. 

So what should progressives be proposing?

First, the Social Democrat’s Cian O’Callaghan, TD is right:  the Government must publish an updated summer economic statement to account for the recently agreed 15 percent tariffs.  The Government should be hounded at every opportunity to produce these numbers.  They have the projections so why would they withhold them from the public debate?

But we must go further.  Over the medium-term, how do we balance the economy’s deficit and end our reliance on windfall corporate tax receipts.  The only exception should be clearly defined and costed capital projects.  The core requirement in all this should be full fiscal transparency.

Finally, progressives need to show competence in putting forward an alternative fiscal framework – one that is sustainable, removes inflationary pressure, and provides as much security as possible in a volatile world. 

And we should jettison any fairy-tale notion that there is a goose laying golden eggs for us at the top of the beanstalk. 

* Thanks to my good friend, TM, for the framing of windfall corporate tax receipts as ‘magic beans’.