Covid-19 has not just devastated society and the economy, it has also shattered political conventions. It is two days since the government unveiled an unprecedented €17.75 billion budgetary package and the main criticism from the opposition benches is that it did not go far enough. 

In the pre-Covid world, the very idea of a budget co-authored by Paschal Donohoe and Michael McGrath so dramatically increasing the size and scope of the State through a series of dramatic policy interventions would have been unfathomable, almost unimaginable. 

Michael McGrath knows this himself. But sitting in his office less than 48 hours after delivering his first speech as Minister of Public Expenditure and Reform, McGrath also accepts that he is operating in unimaginable times. “It is surreal for us and surreal for everyone in the country,” he says.  

Just as Covid-19 framed the budget, it also quickly usurped it. Days after this landmark budget was delivered, the attention of policymakers is already reverting back to pandemic management, and to the world of multi-level restrictions and lockdowns.  

Last night, McGrath attended a cabinet meeting that imposed heavy restriction on the three border counties, plus enhanced measures on the rest of the country.  

McGrath says the restrictions were necessary, and that moving the border counties to Level 4 would have happened regardless of similar moves in the North. The numbers were simply too high, he says, and the pandemic was spreading too quickly. 

He is eager to explain the decision to curb discretionary homes visit, saying there was no problem visiting an elderly parent or a vulnerable neighbour.   

“We are talking about cutting out unnecessary discretionary house visits that cause the real difficulty,” he says, adding that the Government also wants an increase in mask wearing. 

“We are going to come to a point where we will all be wearing a mask most of the time. We are getting there gradually, but we are not there yet,” he says.  

“It is such a shame to have to shut down large parts of our economy when we know what the cost of that is to individuals, families and businesses, when doing some simple things would help address the problem we have.” 

*****

The office of the minister for public expenditure is on the first floor of the Merrion Street building his department shares with the Department of Finance (Paschal Donohoe’s office is on the ground floor). It has striking views of Government Buildings, which McGrath says are enhanced when the sky is dark, and the lights are shining brightly.  

The office is minimal, yet homely. There is a picture of Bantry, the hometown of his father, on the wall, plus a photo of McGrath receiving his ministerial seal from President Michael D Higgins in June. There is also a tribute to Jack Lynch and a picture of the late Brian Lenihan, the last Fianna Fáil politician to have a ministerial office in this building. 

The picture was the subject of a Freedom of Information request concerning how much it cost. “We actually pointed it out ourselves and got it framed,” he smiles. 

There is also a scattering of other artwork – some his, some state-owned – and various briefing papers and documents.  

McGrath’s journey to this office was a long one – he spent nine years shadowing the finance brief in opposition – but he has arrived at a time of profound challenge and that challenge has required profound ideological shifts. 

Deficit and borrowing targets have been reset, and McGrath has helped deliver a budget that will affect the nature of the state itself and of its relationship with its citizens.  

Even stripping out Covid-19 measures, Budget 2021 is still wildly expansionary. Taking advantage of cheap funding and a forgiving Europe, the government increased core spending across a range of departments such as health, education and justice.  

“We wanted, as an outcome of the Budget, to deliver a sense of confidence to the country.”

Michael McGrath

It is McGrath’s job to ensure that the largesse is spent well, as opposed to just being spent. This, he says, will involve constant interactions with line ministers, and there will be new procedures and external assessments on major capital projects.

Future allocations to departments will be based around performance, and McGrath says he is determined to base that performance on stated targets and deliverables. 

McGrath also knows that the spending splurge cannot go on forever, and that the deficit must be reduced. He is already talking about a pathway towards deficit reduction.

This is unlikely to make him universally popular with his colleagues, but McGrath argues that his job is about far more than just cutting cheques. “This is a great department in the sense that you have a fantastic helicopter view of government. Almost everything comes through here at some stage of the process, so I see myself now as acting in a supportive role for all the line ministers through 2021,” he says. 

Until his arrival in June, the office had been vacant, with Paschal Donohoe running both portfolios. Politics aside, McGrath says the body of work requires two ministers, particularly facing the twin threats of Brexit and Covid-19. 

“It is important that this department asserts itself as a distinct independent department that is now at the heart of government., and having its own minister definitely helps underline that,” he says. 

Over the course of a lengthy interview, we discuss the role of the department in managing the public finances and driving reform, as well as other major issues such as the future of the Irish banks, Brexit, homeownership and youth unemployment.  

We begin, however, with an unprecedented budget for an unprecedented time. 

Ian Kehoe (IK): One thing that came out of the Budget was the size of the state. It has increased dramatically. Some of it is once-off. But much is not. And at some point, that will have to be paid for, or we will have to pull back services. 

Michael McGrath (MMcG): First of all, I think you are right, the state is going to be bigger into the future, if I think particularly of health, for example, which has got the largest increase of around €4 billion. Of that, around €2 billion is an increase in core expenditure which will be repeated every year. But the purpose is to make that step change towards implementing Sláintecare and increasing permanent capacity of our health services. It is going to be bigger and it needs to be better and it needs to deliver better outcomes. 

We think that given the set of circumstances that we faced we have made the right overall decisions. We had to go big in this budget. The one core message that we wanted to get across to the public and the business community was that the government will stand with you, that the government will step in and inject supports at a time when parts of our economy are so weak.  

We wanted, as an outcome of the Budget, to deliver a sense of confidence to the country. And seeing the way the budget has landed, I think that has been broadly successful. 

How are we going to pay for it all? So, you know the figures very well in terms of the scale of the deficit – over €21 billion this year and not much less next year.  

IK: And a debt to GDP ratio that is up there when we went into the bailout a decade ago. 

MMcG: We looked very closely to the debt-to-GNI* figures, which are higher because it is applied against a much lower denominator. It is rising of course – from 108 per cent now to 114 per cent next year. We believe it is manageable, but we also recognise that the extraordinary interventions of the ECB in the pandemic bond-buying programme will not last indefinitely.  

So, we are going to have to demonstrate a pathway of deficit reduction and show that our public finances will become sustainable. 

This year, we did not set out five-year fiscal forecasts because they would not have had much meaning given the level of uncertainty. But we will be setting out multi-year forecasts in the stability programme update. We thought very carefully, both Minister Donohoe and I, about where our deficit should be landing, and we think we have got the balance about right in terms of coming in hopefully below 7 per cent this year and below 6 per cent next year. 

That should put us in pretty good company in European terms, because we don’t want a situation that when the ECB starts to change its policies, we look exposed. We don’t want to stand out from the crowd or be remarkable in negative terms in how we look fiscally. We would get unwarranted attention and we know where that we will lead. We will get higher borrowing costs and all of the risks that are associated with that. 

IK: There could have been a temptation to go even further this year. But I get a sense you held something back in case you need to go big again next year. Is that a correct assessment? 

MMcG: The landing zone we have arrived at in the budget is about right. There are capacity issues in going beyond that. Earlier this year, when we were doing the July stimulus, we were looking for areas to spend money over the remainder of 2020 and it is not always as easy as you think, particularly in the capital area where you really do want to spend money because it is once-off and it creates employment and improves infrastructure.  

Similarly, for the rest of the year, we are providing an extra half a billion – €300 million of that is the rates waiver – but we have been looking at other areas when we can spend money. 

It can take the system time to get schemes up and running. That is the one real takeaway that I have had from the last number of months. There are lots of ideas bouncing around, some great ideas, some are only concepts, but unless there is a scheme that is operable and can be put into effect to start channelling money out to the people you want it to go to, it is only pie in the sky.  

When you are in here making decisions, one of the first questions I am going to ask into the future is ‘have you got a scheme to actually do it, have you got the systems or the operations in place?’ 

Very often that is why we end up using Revenue and why we end up using Social Protection, because they have very sophisticated systems that work well. We saw that with Revenue and the Wage Subsidy Scheme, and now with the CRSS [Covid-19 Restrictions Support Scheme] programme. 

IK: We have seen big increases in health, education, even justice. The crisis has given you the opportunity to put more money into the system for non-Covid-related matters. Would we have put that €2 billion into health if the deficit rules were applying? 

MMcG: There may be an element of that, given that the normal Stability and Growth Pact rules have been set aside, and borrowing costs are so low. But I really think that we needed to take that step in health anyway. It is not just about putting more money in. At the very first meeting I had with Minister [for Health Stephen] Donnelly and his officials, I was very clear that any additional money would be linked to specific outcomes in terms of permanent improvement in capacity. That is why we have the actual bed numbers, the specific number of care hours. In the past, you would be told to wait for the service plan. You give them the money and the service plan comes out in December. But there was no way we were going to give an additional €2 billion of recurring expenditure and not know exactly what we were going to get for that. 

We had very good discussions and I am very satisfied that health can now deliver. If so, it will be money well spent. 

A twin business threat of Covid and Brexit 

The Governor of the Central Bank Gabriel Makhlouf has previously suggested that certain sectors should be let die and that the funds should be directed towards areas that could best weather the storm. The government disagrees with this approach, and the mission of Budget 2021 was that no business should be left behind. The flagship Covid-19 Restrictions Support Scheme (CRSS) has been introduced, wage subsidies have been extended and Vat reduced for the hospitality sector. 

However, despite a pre-election pledge from Fianna Fáil to cut capital gains tax by six per cent, there was no move on this tax.  

IK: One thing that was not the Budget was a cut to CGT. You wanted it and had a very ambitious plan in your manifesto. We know the Green Party did not want it. Are you disappointed that it did not make it? 

MMcG: It is a three-party government. The Programme for Government did not commit to a reduction but did commit to keeping it under review. It was the Fianna Fáil policy in the election to reduce CGT and I still think it has real merit. I would hope that over the lifetime of this government that some progress could be made on that front because at 33 per cent, it is a high rate and it is preventing some transactions from happening that would otherwise happen, and it is a deterrent to some businesses scaling upon Ireland and choosing Ireland at their base. It can only happen if there is agreement among the parties, and there is not agreement right now. It will remain under review. 

IK: Much was leaked in the budget, but the one surprise was the CRSS scheme. What was the motivation behind it? 

MMcG: It was being worked on for weeks, but thankfully was one of the items in the budget that the media did not get hold of. It is an attempt to address the appalling scenario facing so many businesses where government imposed restrictions that mean they can’t trade or only do limited trade. Meanwhile, their fixed costs continue to have to be paid or accrued. It is an attempt to provide cash to businesses to keep them alive. 

If businesses were viable pre-Covid, I think they deserve the benefit of the doubt. Of course, the government will face very challenging decisions down the line as to what businesses, perhaps even what sectors, are viable into the future. But businesses that were viable pre-Covid are deserving of support and we need to keep them alive and give them a fighting chance of coming through this.  

We cannot guarantee, by any means, that every business that was here pre-Covid will be here afterwards. Some are already gone, and tragically, are not coming back. It is likely that more will unfortunately meet the same fate. But this support is hugely significant and will directly help safe many businesses.  

The costs will be very significant. In a sense, we can’t control the costs now because we have set out the parameters of the scheme. The costs will be determined by the nature of the health restrictions that we have to impose and things are moving very, very rapidly on the island of Ireland. We are not in a good place and it is deeply concerning.  

The frustrating thing is that if we all worked to abide by level three, I think it would work. But we have too many incidences where the spirit of it and the detail of it have not been complied with. 

McGrath on wellbeing budgeting

In his budget speech, Michael McGrath referred to plans for a wellbeing budget similar to New Zealand’s. McGrath says it will go beyond pure GDP and try to take into accounts other factors such as quality of life. “From a Fianna Fáil perspective going into the last election, we signalled that our priority would be to improve services and make sure they are available for people when they most need them,” he says. 

“We have seen in this budget a very significant emphasis on protecting public services at a time of great challenge and improving them. It is about the key milestones in a person’s life and the things that really matter to them – having access to good services where and when they need them. It is a framework that we are developing. The economic indicators will always be central to the work of a department like this, but we are serving a society as well and it will be an effort to bring that societal element to the fore in decisions that we make.”

IK: It says something that we have gone this far in the conversation with only a fleeting mention of Brexit. Are you confident a deal can be achieved, and if not, are we ready? 

MMcG: I am reasonably hopeful a deal will be achieved. I think it would be wrong to say confident. But the background briefing and channels we have open indicate there is a willingness to do a deal. I think the last thing the UK economy needs now, on top of Covid, is a no-deal Brexit, and they will probably have arrived at that conclusion already. It will require compromise in a very short period of time. The best we can hope for is a slimmed-down trade deal that avoids quotas and avoids tariffs. My sense is that it will be done, but we had to make the judgment call in the budget of preparing for the worst possible scenario. 

Are we ready? We are as ready as we can be. Nothing an Irish government could do can insulate a country from a no-deal Brexit. The impact of tariffs would be immediate and devastating. We have a recovery fund to step in and provide emergency supports and provide a lifeline. But make no mistake, a no-deal Brexit is a bullet we really, really need to dodge and I hope we can in the next few weeks.  

Value for money, reforming the system 

IK: You mentioned performance review in your budget speech as being part of the ongoing process of budget reform. When performance reviews happen, will they be connected to changes in funding at a programme level? 

MMcG: Yes, over time. We are now publishing rolling spending reviews, which look at a whole range of different areas in expenditure. The outcomes of those spending reviews have to feed into budget allocations and spending decisions. I want to make evidence-based spending decisions during my time in this department. I am really focused on the need for outcomes. I am not allocating funding to votes, or to departments, without knowing exactly what that money is going to be spent on, what are we going to get and how it will help us move in the direction we want to go, which is better and more efficient public services.  

IK: And that brings up the issue of value for money. I can point to things like the Children’s Hospital, and others, and departmental overspends. We have been poor at getting value for money. How will you address this given the huge sums of money that are going to be spent? 

MMcG: Do you mean current or capital? 

IK: We can come to capital in a moment, but on an overall basis – in your interactions with departments.   

MMcG: The department here is very focused on its relationship with the line departments. There are people in this department whose sole job is to work with a particular department. There are a lot of people here who are working solely on health, for example. We are very much involved with the engine of it.  

I get very regular updates from the sections of this department that are involved in spending and are involved in monitoring progress.  

On the capital side, I think there is a great opportunity now. First of all, we can borrow at low interest rates. Second of all, I think some capacity in the construction sector is likely to be freed up. There is not likely to be the same emphasis on commercial building like offices and hotels and so on in the short term.  

What we are doing to ensure we get value for money is that, as part of the review of the public spending code, we are now examining projects that are over €100 million in value. That review is ongoing and will be completed early next year. That will feed into the overall review of the National Development Plan. As part of that, we have commissioned EY to carry out an assessment of the capacity within the public sector to manage and deliver projects. 

I am very keen that as part of the review of the NDP we find an appropriate way of introducing an element of external assurance in the management of major projects, that would involve, for example, independent peer review at key decision gates in the management of the capital budgets. I am going to reform the process. 

Now that the budget is over, I will be bringing a memo to government to formally commence the review of the National Development Plan. It is not just going to be about what projects we can add and how much more money we can add. It will be about how the process works, how we improve it and how we can deliver better value for money. 

IK: I am really interested in the NDP and capital spending. You are trying to roll out multi-year spending plans which decide where infrastructure will be built at a time when people are talking about the future of the office, about the future of towns and cities. 

MMcG: Undoubtedly, there will be permanent change as a result of Covid-19. But we will get beyond Covid. While there will be a change in the nature of work practices and a more blended mix of remote working and office working, the city will come back. We will have a vibrant capital city and vibrant other cities beyond Covid-19. 

Young people, in particular, will always want to work and live in city centres. Cities will always be the driver of the economic engine of this country. We do, of course, need to consider what it an appropriate level of remote working. There was that move already in the public sector anyway – the Programme for Government committed to 20 per cent of remote working next year. I think there will be a blended mix, but I don’t think young people want to be stuck in an apartment working from home and not mixing with other people. Cities will come back, but there will be a blended mix. 

That will help the regions to an extent. I think remote working hubs and co-working spaces that we are seeing popping up all over the country offer undoubted benefits for towns and villages in regional and rural Ireland. But cities will always be a part of it. They have to be. You need to have that focal point, you need to have a buzzing, vibrant city centre with a good infrastructure with high-value and technology-led business. 

IK: It is already having an impact on commercial property. Eason has written down the value of its property on O’Connell Street by 40 per cent. This gives you an opportunity to redefine what a city and a town can look like. 

MMcG: It does, and we have seen a good start made on that. We are seeing street spaces being used a lot more smartly. We are moving towards the European model in that sense, even if we don’t have the weather all the time. It is great to see. Princes Street in Cork is now extended outdoor dining space. But there needs to be investment in public transport to get people in and out also. 

A lost generation, home ownership 

One of the most striking numbers that emerged from the two budget speeches was the youth unemployment rate of 37 per cent, confirmation that young people have been among the worst hit by this crisis.  

But the issues facing the next generation go further than this cold number. Many are locked out of the housing market; unable to buy because they are struggling to rent in an inflated market. Few have pensions and those lucky to have jobs are often working on short-term contracts or within the gig economy.  

Many economic commentators have pointed to a potential lost generation. McGrath believes that the key strategy of the budget – keeping businesses alive through supports, subsidies and handouts – is the best way to help the next generation, as it ensures they will have jobs to go back to.  

“We have put a massive amount of resources into a whole range of labour activation measures around reskilling, retraining, educational opportunities, apprenticeships, back-to-education allowances, supports for people looking to start their own business. A whole range of measures are being rolled out. But unless you have a strong enterprise economy where businesses are looking to take people on, then young people will be the ones to suffer the most.” 

IK: Staying with that theme of a lost generation, where do you see the future of home ownership? 

MMcG: I think that there needs to be hope for people who aspire to home ownership. Not everyone does, and that is very common across many European countries. But in Ireland, there is a strong affinity with owning your own home, and I think we need to help people who are in a position to afford a mortgage. We can do it in a number of ways. We can make homes more affordable, by, for example, making sure we service land. It might not be the most flamboyant element of it, but unless you have the water services and the wastewater services in place, then land can’t be developed, and this has a direct impact on the final prices. Irish Water has done well in this budget. It now has a budget of €1.3 billion going into next year, and that will help to service land and enable more land to be developed. 

There is limited scope for reducing other costs, and that is a challenge. There is no going back on the improvements in standards and regulations that have been introduced in recent years. In different parts of the country, land costs are a really significant factor. In terms of the private market, we are helping with the Help to Buy Scheme, which has been extended out until the end of next year and that is a real benefit to people buying new homes – although it is only new homes. It is designed to stimulate supply and make building more viable. 

The State needs to become more directly involved as well, and that is where we see the Land Development Agency having a more central role. Once the legislation is passed, they will be able to access funding of €1.25 billion from ISIF, and they intended to spend €140 million of that next year, on top of the base of €60 million, to build units.  

There is the Service Sites Fund, with more than €300 million in that. Some of those schemes are being developed. It takes time. A few hundred units will be delivered in 2021, but there is enough funding there to deliver about 6,000 homes. Minister Darragh O’Brien is working on a new affordable purchase scheme and he will bring forward the details of what very shortly.  

IK: Is that the new €75 million equity loan scheme? 

MMcG: Yes. 

IK: The UK version is around 10 per cent. Is that something you will be looking at? 

MMcG: It is at an advanced stage. I won’t get into the details, but the minister has done a huge amount of work on it. It is a shared equity model, which we have had in the past. The homes that we are developing under the serviced sites fund are also under a shared equity model. Some are currently under construction. He is working on a much more ambitious scheme, and we have made a start in this budget by providing funding. 

In overall terms, it is about up helping in whatever way we can to make homes that are going to be built more affordable, while trying to bring down costs and helping with the servicing of land. But the state does need to do more to build affordable homes to help first-time buyers, and we are doing that.

*****

The interview is drawing to a close, but I want to ask McGrath about the nature of government in such strange times. Having watched on for so long, he has found himself dealing with a public health emergency, one that requires constant decision-making – some reactive, some proactive.  

“I really hope we will be looking back in a few years’ time at pictures of us wearing masks and socially distancing and thinking of lockdown – and really pinch ourselves and wonder did that happen. I hope we get to that point,” he says. 

“The job is very different because of the circumstances we faced. We had a financial crisis a decade ago, and we now have an economic crisis as a result of a global pandemic. Like the vast majority of people, it was the last thing I ever thought would happen.  

“But such is life and life throws unexpected challenges at you all the time. Thankfully we are able to access the resources to do what we did this week. That has been a saving grace. I do think about what it would be like if you could not access funding to do the things that we have done in the Budget. That would be a truly appalling vista. And the job of Minister Donohoe and I is to ensure that we remain on a sustainable path. And we work really closely together and that is important. We are speaking with one voice. The relationship is at the heart of government.”

Further reading on Budget 2021

Ian Kehoe: “The government has rolled out the heavy artillery – but kept some ammunition in reserve in case things get worse”

Stephen Kinsella: When you absolutely must stimulate all economic sectors using ultra-cheap borrowed cash, accept no substitutes

Sean Keyes: A sick economy, tatty infrastructure, a surging population and cheap credit – these are perfect conditions for a capital spending splurge

Thomas Hubert: Green shoots in budget 2021? Government shows intent with funding for home retrofits and public transport