Inflation. It is a word that kept cropping up during my interview last week with Paschal Donohoe, the minister for public expenditure and reform.

Throughout the lengthy interview, inflation was a constant theme, with the minister referencing, or alluding to, it when answering most of the questions that I posed. 

It is related to everything: from growing populism and anger that is dominating the political narrative to the ability, or, in fact, inability of the state to deliver major projects on time and on budget. 

As a senior cabinet minister who is co-authoring the upcoming budget, Donohoe is seeing the impact of inflation domestically. As the president of the Eurogroup, he is also seeing its impact throughout the continent. Put bluntly, inflation is on Paschal Donohoe’s mind.

Some of the concerns relate to the present. But some also relate to the past.

“What preceded our last economic crisis was a period of heightened inflation. And that wasn’t the reason the economic crisis happened,” Donohoe told me last week. “You will remember all of the other factors that happened across that period, from a budgetary policy, banking policy perspective, and then how we managed our employment markets. 

“But very high homegrown inflation was a factor in some of those decisions. And the lesson of economic history is unambiguous – high inflation for long is incredibly socially divisive and economically very injurious. And that is why even though it’s really, really hard at the moment for so many, we have to try to get the inflation down. Because if we don’t, the effects that could have on all of us will be longer and even more serious.”

It is a salient point. The rise in the cost of living has the capacity to impact so many people and so many businesses. It is why it is one of the main priorities on Donohoe’s agenda.

But it is not the only thing occupying his thoughts. 

During a wide-ranging interview, he also expressed his views on a myriad of topics, including the rise of populism, how a budget is crafted, and what may well be included in that budget. 

Here are five key takeaways.

1. Tax breaks for landlords

The government knows that there is an issue in keeping small private landlords in the markets. It does not know the cause of the problem, something that both Ronan and Stephen have written about. But, as Budget 2024 approaches, it now seems inevitable that there will be a tax package for landlords.

“The minister for finance has indicated this will be something that he’s considering for the budget. I do believe we also need to continue to identify all the other issues as to why private landlords are leaving the rental sector. We have to look at how we can get the balance right, between the need to protect the tenant, which is of utmost importance, and at the same time have people who are willing to provide private rental accommodation apart from institutional providers. Tax policy has an important role to play. But there are other policies that also need adjusting over time,” according to Donohoe. 

2. An unhealthy problem

Regardless of the amount allocated to it, the Department of Health has shown a massive inability to manage its finances and its budget. It received a massive amount of additional funding during the pandemic, and much of that increase has now been baked into the system. 

It is a significant problem for the Government, and, as the minister overseeing public expenditure, for Donohoe. 

“A very important feature of this budget will be how we can have a more credible spending plan for the Department of Health in the time ahead. It has been a regular feature now, over many, many years. And over a number of years, we did make progress on it. And now we’re not making as much progress on it as myself and Minister Donnelly would want.

“I need to do two things. Firstly, I need to work to make sure this doesn’t end up being a big risk to spending in other government departments. And then secondly, when we announce the health budget, we need to have a more credible plan regarding how this issue will be dealt with in 2024. And that’s what I’m working to deal with,” he said.

3. The rise of populism

Throughout the interview, Donohoe made the case for the centre – and for the government’s stewardship of the public finances. He also addressed the rise of Sinn Féin, arguing that it was inevitable that the only major opposition party in government would see a surge in support.

But he also argued that it was important to understand the difference between policy and populism.

“When we get to the election happening, I believe there’ll be a case to be made that this is a government that has led Ireland through a pandemic, that has led Ireland through the economic consequences of a war, that is still building more than 30,000 homes a year and is able to increase spending and public services because we have a budget surplus,” he said.

“That’s the argument I’ll be making. And the alternative will damage all of that, and I believe could cause great damage to all of that. I believe they will build fewer homes, I believe they will have less money over time to invest in our public services. And I believe they will ultimately be a threat to trade and jobs that the prosperity of this country depends on.”

4. Advice and all that

The Fiscal Advisory Council has been quite vocal on its objections to the government’s budgetary strategy. Put bluntly, it believes the state is spending money it cannot guarantee in the future. Essentially, windfall corporation tax has covered up holes in the Exchequer.

“Without the exceptional levels of corporation tax receipts being collected, the Government would still be running a deficit. Official estimates from the Department of Finance put the windfalls at €11.8 billion in 2023 — close to half the €24.3 billion of total corporation tax receipts expected to be raised this year. This is equivalent to more than one in every four euros of tax receipts anticipated,” according to the watchdog’s pre-budget assessment.

Donohoe, however, has a different view: “The consistent point that they have made, which is don’t spend one-off tax receipts, don’t make your public services dependent on it, and don’t overheat your economy – I’ve delivered it. The reason we have a €10 billion surplus is I have not spent the one-off tax receipts that have come in. So I hear where they are budget to budget.

“But beginning in a minority government, all the way through now to a government that has a majority, that dealt with a pandemic, and had to deal with the effects of the war and soaring inflation – through all of that, year by year, budget by budget, we’ve got back to a surplus twice, now. So that gives me a degree of confidence in looking at where we are now, and squaring off the need for a surplus with the social and political reality of where we are. And 6.1 per cent spending growth in the context of inflation at the moment of 5.8, 5.9 per cent and a €10 billion surplus for this year alone – I would make the case is a very good balance.”

5. Indigenous business support

Domestic businesses have long felt that they have not received the same level of support as multinationals.  This is something I put to Donohoe last week. His response was not on the ongoing supports, but on the subsidies that the sector received during the pandemic.

“The number one economic decision that I made during the duration of the pandemic is that we would protect the SME sector in our country when we were asking them to close down for our own health,” he said. “And we made available the best-designed and most comprehensive economic support that was possible at the time. The need to support the SME sector led to the single biggest economic intervention in our economy in the history of the State, which was the employment wage subsidy scheme.”

*****

Elsewhere last week, tax warehousing was introduced to help businesses struggling with cash flow during Covid-19. But an unforeseen repercussion of the scheme means the Revenue Commissioners may get burnt, as outlined in the case of Mac Interiors. A lawyer took Francesa through the implications of its examinership.

Family businesses employ twice as many people as foreign direct investors and the state sector combined, yet they are a disparate group. John McGrane, director general of the Family Business Network, is grafting hard to make the sector’s voice louder and more political. He talked to Alison as part of our Family Matters podcast series. 

Places where homes were more expensive a year ago have seen, on average, smaller increases (or indeed price falls) over the past 12 months. The cheapest places a year ago have seen the biggest increases. Ronan had the details.