Five things on the next minister for finance’s to do list

When the next minister for finance takes office, there will be a hefty document on the desk containing a briefing on all the key issues. It will not be designed to improve the ministerial mood. There are few bodies in the State more expert in looking at a glass and declaring it to be, at best, half-empty. An institutional memory of how boom can turn to bust runs deep and, like the rest of us, the department has struggled to come to terms with the wall of money that has landed in the Irish exchequer over the past decade and the question of how sustainable it is. Its warnings that this could all end quickly have not come to pass, with corporate tax revenue more than doubling between 2015 and the pandemic and since then more than doubling again.
So why the warnings in his inbox? Well, higher revenues have increased the spending base over the last decade – government spending next year will be twice 2015 levels. And so while the public finances are now strong, they are increasingly vulnerable to a fall-off in tax revenue. This creates a mix of public – and political – expectation of spending continuing to rise, but a risk of serious trouble if corporate taxes do take a hit. Throw into the mix an economy already at full capacity and the difficulties this creates in, say, building more houses or infrastructure and there are tricky balances to be struck.
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In the light of all this, here are the key issues the new minister will have to face.
1. Economic diplomacy: Money is always nice, but the extent of Ireland’s extraordinary windfall has brought unwelcome attention. Just last weekend a Wall Street Journal front page headline read: “The Irish Government is unbelievably rich. It’s largely thanks to Uncle Sam.” The key point was that much of the corporate tax paid here should really have been paid in the US, were it not for the tax-planning manoeuvres of the companies involved. The new minister will be central to the Government’s response to the new Trump administration, where senior figures have pointed to Ireland’s tax and investment haul. Ireland had hoped that joining the OECD corporate tax deal had put this issue to bed, but – while it was the right thing to do – it hasn’t done so. And the Apple decision in the European Court of Justice earlier this year put Ireland right back in the spotlight, but of course did also deliver a further windfall of €14 billion.
2. Strategic planning: Stepping back from the immediate uncertainties, it is clear that Ireland faces big challenges as the globalisation trend – from which we benefited – reverses and the world breaks up into different trading blocs. As a result, Ireland’s economic model is under some threat. Trade wars are possible and as well as the US, other EU countries also have an eye on our tax pile. Meanwhile more trouble may be brewing in the euro zone, as the French government may fall over attempts to right its state finances. There is a complicated arena here for the new minister to navigate, a lot of which comes down to trying to hold on to as much as possible of the gains that Ireland has made in recent years.
3. Expectation management: The department will warn the new minister that everything cannot be done at once. And they are right. There will be a big job of managing public expectations, but more importantly keeping control of the new cabinet. A vital job is setting a credible path for the public finances, involving some guidelines for spending growth (that is actually adhered to). In an uncertain world, the new minister – along with his colleague in public spending – needs to maintain vital leeway in the public finances in case revenues fall off, either temporarily or permanently. Remember that the Department of Finance calculates that up to half of all the corporate tax collected is “windfall”, in other words not tied to activity in the Irish economy, but to international tax planning. Even apart from this, recent experience suggests that in an uncertain world, room for manoeuvre is priceless.
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Ireland is in a strong position first and foremost because the underlying dynamics of our public finances are strong – the burden of the national debt is falling and budget surpluses are forecast. Whatever the short-term ebbs and flows, this needs to be safeguarded as it is hugely valuable, helps to avoid another boom-to-bust cycle and sets Ireland apart from many other countries – just look at the market wobbles already hitting France, rows about public finance rules in Germany and a recent grim UK budget.
4. Ending once-off supports: The Government has relied on once-off payments to support households over the last few years. These were a reasonable response when trouble hit, but have continued for too long. They do not give ongoing support to those who need it – and the universal element of these payments, particularly the energy credits, gives cash to people who could quite easily manage without it. This is not sustainable and the priority must be to direct permanent support at less well-off households. There are difficult political challenges here. But best to face up to them early in the government’s term.
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5. Focusing on what can be done: The two budget ministers – in finance and public spending – will play a central role in vital economic planning. We have seen all the uncertainties – areas where Ireland will largely be reacting – but there are things under government control. The lack of vital infrastructure – in housing, energy, water and so on – threatens investment and Ireland’s economic future, as well as carrying a huge social cost. Ireland’s slow and overly legalistic planning process is drastically slowing delivery. Meanwhile, funding of third-level and further education remains uncertain, another key competitiveness lever. We don’t know what Donald Trump will bring, or where the dial on globalisation will land, but we do know that Ireland needs to get much, much better at delivery of housing and infrastructure investment, and needs a fundamental reset of the policy and administrative levers to do this. Above all, the new government, whatever its shape, needs to accept that more of the same will not do it. If the money continues to roll in for a few more years, it must grab the opportunity.