The electorate needs to be prepared for bad news and primed for positive outcomes. 

The messaging is crucial, particularly in an unwieldy three-way coalition where all the parties are trying to appeal to their core base, while seeking to woo potential new voters. 

Sometimes, however, the messaging can go wrong. The various noises emanating from Fine Gael (albeit not from the man who will actually co-author this year’s budget) about the prospect of a tax cut for middle-income workers has increased the appetite and raised expectations.

At this point, nearly five months out from a budget, taxpayers will feel let down if the budget does not deliver a sizable tax cut and put, as a host of Fine Gael parliamentarians have publicly stated, some money back into people’s pockets.  

The internal politics of the various proposals are fascinating. The Taoiseach Leo Varadkar has confirmed that he was aware in advance about an opinion piece by three Fine Gael junior ministers in recent weeks proposing a €1,000 tax relief for middle-income workers.

Last week, when asked about the proposal, the Minister for Public Expenditure and Reform Paschal Donohoe said he was not informed in advance. It is curious, to say the very least, that the party’s point man on finance was not briefed on a proposal co-written by a junior minister in the Department of Finance, and it has been suggested within the party that the proposal would never have been made public had Donohoe knew it was coming.

“I wasn’t involved in the drafting of that document, but what I would say is that it has been a constant focus of Fine Gael over the last number of years to try and put money back in people’s pockets,” he told Claire Byrne on her RTE radio show. 

Donohoe might well want to put money back in pockets, but, given his penchant for prudence, it is unlikely that he would have gone anywhere near the proposal put forward by the three junior ministers.

Yes, people might well fancy a break, particularly given the surge in corporation tax receipts. However, this does not mean that the state can support one.

This point was evidenced by two serious reports published last week – one from the Central Bank and the other from the Fiscal Advisory Council (Ifac). 

Both documents are dense and full of analysis. At their core, however, both highlight the fragility of the global economy – and Ireland’s place within it. They also starkly point out some home truths – that without the excess corporation tax that everyone acknowledges is not guaranteed into the future, the budgetary surpluses would evaporate.  

Consider this: the Government expects to run its first underlying surplus in 17 years next year, when excess corporation tax receipts are excluded. The national debt, meanwhile, stands at more than €235 billion. This is the context of the clamour for tax cuts.

In fact, Ifac warned that political pressure to cut taxes in response to large budgetary surpluses is now one of the key risks to the public finances.

Ifac said the Government faced “a difficult set of choices” between adopting new tax and spending measures, maintaining existing spending and staying within its own 5 per cent spending rule. Put bluntly, it cannot do all three.

“Going beyond this, without offsetting tax increases or spending cuts, risks repeating the mistakes of the 2000s. It would mean using temporary revenues from corporation tax and an economy at full employment to finance permanent expansions,” according to Ifac. 

Furthermore, the council, comprised of a number of independent experts, said such a strategy risked “fuelling further price and wage increases, given how tight the labour market is” adding: “With capacity constraints, additional investment may not provide value for money. Instead, the Government should explore ways to alleviate capacity constraints, including through fiscal tightening elsewhere.”

The impact of tax cuts and spending hikes on inflation was something that also concerned the Central Bank, with Gabriel Makhlouf saying if Government policy choices fuel demand at a time when the ECB is trying to slow it down, it just means that monetary policy is going to have to work harder.

“I think it’s also very important to think very carefully about what’s happening to inflation, what the various budget proposals will do to aggregate demand, and what that will mean for monetary policy,” he told RTE last week.

According to the Central Bank, the Irish economy remains “vulnerable to the risk of persistently high inflation and the lagged cumulative effect of the accompanying increase in interest rates”, and that “weakness in global trading partners may contribute to a slowdown in growth, while any difficulties among the largest multinational enterprises present in Ireland would have severe implications for the fiscal position”.

Interestingly, the bank zeroed on the commercial real estate sector in Ireland, warning that higher interest rates have manifested most visibly and immediately in that market. In line with the deteriorating global environment, Irish commercial real estate prices have fallen 9.4 per cent in the year to end-March. 

“While further price falls in CRE markets would pose risks to borrowers, and downside risks cannot be ignored, the knock-on effects for the banking system and wider economy appear at this stage to be relatively contained,” the bank said. “In residential markets, where weak supply may somewhat mitigate the magnitude of price falls, increases in mortgage interest rates are starting to slow demand and have contributed to a flattening in house prices in recent months.”

Stephen entered the debate last week in his column in his usual articulate way. Yes, he accepts the economy is well positioned, but he also argued that, as a country, we need to think about how we will fund a larger state going forward. This, he said, was more important than political dispatches over tax cuts.

“A bigger state is in my view inevitable, and one double the current size in terms of nominal spending in the next 20 years would not be beyond the bounds of possibility. This implies we’ll generate far more economic surplus than we do now, are much wealthier, and have a larger redistributive arm to the state,” he wrote. 

“The good times are there for many more of us if we make the right choices.”

As political and public pressure increases for tax cuts, it is important that we make the right choices – not just the popular ones. 

*****

Elsewhere last week, I caught up with Padraic O’Kane, who runs two prominent city centre restaurants and brings US college football to Dublin each year. His own eateries are back operating at pre-Covid levels, but he has growing concerns about the hospitality industry outside of the main cities, many of which he believes will close down if they are forced to repay warehoused tax debts.

Ireland’s financial advice industry has problems with transparency, conflicts of interest, and the marketing of unregulated investment schemes. So, says Carl Widger, managing director of Metis Ireland, who told Sean that the regulator needs to step up.

New working and shopping patterns plus higher interest rates have altered the commercial property equation, but agents TWM say there are plenty of cash investors. Founders Seán O’Neill and Michele Jackson explained to Tom how uncertainty gives their firm an edge.

Sam Altman, the man who leads OpenAI, the artificial intelligence research organisation that is sweeping the world, is on a listening tour of Europe aimed at making his product more acceptable to regulators and the public. Joe Haslam caught up with him.

Finally, The Currency and wealth management firm Rockwell want to know your views as an SME owner, director, or senior leader. If you fill out the survey, you are in with a chance to win a holiday in the 5-star The Europe Hotel & Resort.