Jim Power: Government takes a scattergun approach to fiscal policy

I fail to see evidence that the economy is overheating, as evidenced by the deceleration in the inflation rate to 0.2% in September, writes Jim Power
Jim Power: Government takes a scattergun approach to fiscal policy

Very 2025 Expenditure Significant Mitments Package, In Picture: Focus, Tax A And Short O'hare A Of Term The Occurring Had With The Significant Expenditure Eddie And Cost In Further Of Amount Budget Living

The Taoiseach said on the morning of the budget that he had no apologies to make for giving people back some of their own money, and this is certainly what his Government did in Budget 2025.

Never were the two relevant ministers faced with such an array of riches.

These include €14.1bn from the Apple tax ruling; €3.1bn from the sales of AIB shares; and a surplus of €1.5bn in the national training fund.

Overlaying all of this is a projected surplus in the public finances of €25.4bn in 2024 and almost €12bn in 2025, before any budget day announcements.

The budget had a very short-term focus, with a significant amount of expenditure occurring in the cost-of-living package, and further significant expenditure and tax commitments in 2025.

There was also some attempt made to take a longer-term focus — with some of the tax proceeds being targeted at investment in water, electricity, housing, and transport

The key short-term issues that the budget sought to address are the impact of elevated inflation and higher interest rates on the cost-of-living, the need to relieve pressure on squeezed middle-income earners, the increased cost of doing business for small businesses, and the ongoing critical housing crisis.

Interpreting the exact size of the incredibly generous budget package is difficult given the confusion around core and non-core expenditure, the fact that a considerable lump of the cost-of-living package will be expended in the three months of the year remaining, and the investment expenditure plans that are spread out over some years.

Track record

The theory of prudent fiscal policy is that policy should be counter-cyclical. In other words: When an economy is growing strongly, fiscal policy should be tightened. When an economy is weak, fiscal policy should ideally be expansionary. Ireland does not have a great track record in this regard.

Budget 2025 is an incredibly stimulatory package, and arguably one that the economy in general does not need, although certain sectors did require specific support.

The overall stance of fiscal policy manifested in the budget is extremely stimulatory and largely ignores many warnings from the Irish Fiscal Advisory Council.

I fail to see evidence that the economy is overheating, as evidenced by the deceleration in the inflation rate to 0.2% in September, measured on the EU Harmonised Index of Consumer Prices basis.

The day before the budget was delivered, the CSO published data showing that the volume of retail sales declined by 2.5% in the year to August

While it may not be overheating, the economy is growing at a reasonable pace and arguably did not warrant the magnitude of the fiscal policy package delivered. The overall approach is very much of the scattergun variety, with lots of money scattered thinly across many parts of society. However, the pragmatic reality is that this is a pre-election budget and the Exchequer is awash with cash.

Having become so accustomed to once-off cost-of-living payments, it will be difficult for recipients to adjust to normality — whenever that happens.

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