The Department of Finance and the Department of Public Expenditure and Reform are two separate, if highly related, government departments. However, they are run from the same building on Merrion Street in Dublin 2.

So, when Paschal Donohoe and Michael McGrath rotated positions as part of the cabinet reshuffle in December, McGrath moved one floor down, and Donohoe one floor up.

The physical proximity is an advantage. The two ministers must co-author the annual budget, and work together across all aspects of the public finances. One department is designed to bring money in. The other largely allocates the proceeds.

On Tuesday, I made my way to the office of Paschal Donohoe. In addition to being the Minister for Public Expenditure and Reform, he was tasked in December with delivering the National Development Plan (he also has a neat side-line as president of the Eurogroup).

It was Donohoe’s first significant interview since moving portfolio, and he covered a lot of ground – from the disconnect between society and economy to corporation tax volatility to the impact of inflation.

Although the interview was wide-ranging, there was a central theme: to translate Ireland’s current economic buoyancy into some tangible for the public (this was a topic that Stephen addressed in his column last week also).

“I am acutely aware of the social cost of us not turning this economic resilience into more homes, better schools, better hospitals,” Donohoe told me. “And I even fully appreciate that it’s harder and harder for me to make the argument for running budget surpluses if we can’t show people that their living standards are either improving or are going to improve soon.”

To that end, Donohoe is on a mission to expedite capital projects by removing roadblocks and capacity issues, while also ensuring that government departments actually spend the money they are allocated.

As he acknowledged, there is a political dimension to the role. An election is in the distance, and the government has been outflanked by Sinn Fein and is falling in the polls. Donohoe and his colleagues must deliver some infrastructure that people can tangibly feel if they are to stand any chance.

“We have to be able to show that safe public finances don’t get in the way of supporting people when their living standards are falling. We have to be able to demonstrate that there is a great value in economic stability. And we have to do better at making that argument and that’s what I intend to do for the remainder of the long mandate of this government,” he said.

In addition to the key issues of delivery, here are five other key takeaways from the Paschal Donohoe interview.

The impact of inflation

Time and time again, Donohoe kept returning to the issue of inflation. For a start, he must work to ensure that higher levels of output do not add to Ireland’s inflationary challenges.

“If we had done this interview seven years ago, we would have had levels of inflation within our economy that were well below 2 per cent,” he said. “As we meet today, we think we are doing well to have levels of inflation that are around 5 per cent. So, that in turn has had a big impact on where we are with the delivery of our capital plan.”

Later on, he argued that long-term inflation at more than 2 per cent poses a real risk to the government’s ability to invest “in our future because we’ll invest but we’ll get less for that investment”.

In addition to working with Europe to get inflation down, he also flagged new measures announced a number of weeks ago for the state to absorb some of the additional building costs caused by inflation.

Capacity constraints

One of the big issues facing Donohoe is the capacity of the state to deliver projects. There has been a significant underspend in a number of key departments in recent years, particularly in the second half of the year. Donohoe wants to address this by increasing resources for key areas such as An Bord Pleanala and also through a suite of measures aimed at speeding up the delivery of the plan, which focuses on areas such as housing, schools, hospitals, roads, and public transport.

“We’re building the capacity and I think it’s a really fair critique and it’s one that again seven years ago I felt was a theoretical risk and now it’s anything but,” he says.

Later in the interview, capacity came up again when it came to the delivery of houses. In this instance, Donohoe argued that the issue was not money but the capacity to deliver.

“Any funding need that the Department of Housing raises with us, we move heaven and earth to meet. Our challenges in building more homes in Ireland are no longer about the level of funding we put against that vital social priority,” he said.

The perils of war

While much of the interview centred on capital projects, the NDP, and public expenditure, Donohoe was clear about what he views as the biggest threat to the Irish economy: Russia’s illegal invasion of Ukraine.

“While there is much happening within the financial sector and this weekend again showed us that, at our peril do we underestimate what this war can yet economically do to so many things that are fundamental to the conversation that you and I have just had, from inflation to the availability of raw materials, to the price of food, to the movement of people.  It is still the defining political shock caused by a war that’s changed our economy that we have to be so conscious of in the short to medium term,” he said.

Tax warehouse

At its peak, some €3.1 billion of tax debt was parked in the so-called debt warehouse. Of that, €2.25 billion remains outstanding. The scheme runs out next year, triggering fears for struggling companies who have availed of it. Donohoe was clear; there will be no write-downs for companies. Instead, if they work with Revenue, they will be able to avail of flexible repayment structures.

“This is something that Minister McGrath is really aware of and really, really understands.  But I do feel of course that the normalising approach that he has outlined in debt warehousing I think is appropriate.  We brought in place those debt warehousing mechanisms to deal with a pandemic. Thank God the most searing effects of that pandemic have now lifted, and I think the strategy that Minister McGrath is outlining from a timing perspective I think is fair,” he says.

The economy is resilient

While Donohoe admitted that not enough homes at been built and there was a lag in people feeling the benefit of the surging tax take, he also argued that the economy had been remarkably resilient in the face of multiple “black swan” events.

“If you look at where we were 15 years ago, when we got hit by the massive shock that was the global financial crisis, it had an immensely negative effect on our society and our economy for many, many years. This time around, we’ve got hit by a pandemic, we’ve got hit by a surge in inflation and we’ve managed Brexit and the change in corporate tax strategy. And we’re still standing, and we are resilient and we’re able to invest in our society and maintain spending on public services,” he said. “That is the single biggest difference for our country now versus where we were a decade and a half ago.”

*****

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