Michael McGrath has been Minister for Public Expenditure and Reform for 15 months. In that time, he has delivered two budgets. Budget 2021 will be recorded as truly exceptional for a host of reasons, not least the speed, scope and scale of the pandemic spending he allocated. Budget 2022 is a different beast. Locked into a spending rule that ensured more fiscal discipline than in many previous years despite buoyant tax revenues, Budget 2022 is less a transitional budget than a transition back to normality.

Because of this, many commentators, including myself, have accused this Minister of lacking vision in preparing the budget. It is here that we start. What is the vision for this government, and how might we discern that vision from the decisions the Minister made over the past few weeks? McGrath is thoughtful, focused, on top of his brief. I was struck when we spoke how he clearly felt the responsibility of his office, particularly when it came to avoiding piling debts up for others to pay off.

We talked about the difference between implementation and allocation. It is fine to allocate money for spending, but how do we ensure value for money and contain the inflation in costs we are very likely to see in the coming years in construction as programmes are implemented? Here the Minister has clearly learned the value of performance budgeting–checking inputs by the state correspond to effective outputs–and the need to beef up expert oversight of capital projects of all kinds. The existence of capital expenditure ceilings by department for the coming years will allow Ministers to plan carefully for how these capital works are delivered. Funding certainty coupled to a clear remit on data assessing performance will be a game-changer for capital projects in this country if implemented correctly.

We talked about decisions not made, especially in the context of the new spending rule brought in during the Summer Economic Statement. This rule, all but ignored by most media outlets but covered extensively on the Currency, is a major move forward in fiscal policy in this country, providing a clear measure by which to judge spending choices.

We talked about the future, and about children. Somewhat impertinently, I decided to ask the Minister about his dual role as a member of government and as a father. Men often don’t get asked about work-life balance by other men, and I found his answer both revealing and very similar to my own experience as a father, though of course I don’t have to balance the state’s finances. He does.

We finished with a discussion about what he has learned about being a minister, what he’d like to pass on to his successor. Here I’m not going to give you a preview, I think it is worth listening to his answer in its entirety.

*****

Stephen Kinsella (SK): It is your second Budget as minister. How has this Budget compared to your previous one?

Michael McGrath (MMcG): It has been very different in many ways but there have been similarities too in that the spectre of Covid is still very much there. When you look at the structure of the Budget, similar to last year, we have a very clear separation between core expenditure and Covid expenditure. That is a very deliberate policy on our part because as we will be seeking to unwind that emergency Covid expenditure – having it separately identified and presented within the structure of the Budget makes it somewhat easier to unwind the emergency supports. We still have Covid, but we are in a much different space with the success of the vaccination programme, and we are looking forward to the further easing of restrictions. But as I said in the Budget, we are not out of the woods yet. Whenever we think we’re getting ahead of us and making real progress, it seems to bite us again. So the the current numbers are a concern. But the population is largely protected with vaccination. But we’ve got to keep it under close review. That’s the truth.

SK: In terms of the overarching vision for this budget, I felt there was a disjunction between some of the rhetoric used in the speeches – and the documentation  – and the implementation. So for example, Minister Donohoe was talking about how the world is burning, you know, one expects to see projects worth half a billion on climate following something like that. What was the vision that guided this particular budget as you put it together?

MMcG: That’s a really good question about the bigger picture. And very often, when it comes to commentary around budgets, the prism through which the questions are asked is ‘well, what’s in it for myself? What’s in it for my sector?’ It is a very fair question. We all live our own lives, and people have a right to ask those questions when they look at a budget. But we do have to have an overarching strategy when we are sitting in the centre, and we are framing a budget. And for us, the key objective here in this budget is to assist economic and social recovery, to start the process of repairing the public finances, and to invest in our public services.

So, you raised a specific point there about climate action. And I would make the point that much of our climate action policies are already embedded in the National Development Plan, for example.

So perhaps if I just give you an overall sense of the structure of the budget, and how we built it – the overall envelope came in at about €87.6 billion, about €11 billion of that was already agreed in the context of the NDP. So all of the capital allocations had already been agreed. And then we had just over €69 billion on the current side, core current expenditure. So that’s where the real negotiations in the estimates process took place. So, all of that adds up to around €80 billion. And then the remaining seven and a half billion or so is the Brexit adjustment reserve fund. We allocated about a half a billion next year for that. The recovery and resilience funding that we got from Europe, about 300 million in 2022, and then about €6.8 billion in Covid. So, all of that is what adds up to the balance. So, in relation to my negotiations and discussions with ministerial colleagues, it principally was about that €69.2 billion of core current expenditure. So for us, when we look at the way in which the economy has rebounded in recent months, I was comparing, as I’m sure you will, the summer economic statement with the macroeconomic and fiscal forecasts that we made yesterday, and, it is really heartening to see, for example, the change that has been brought about in our forecasts around the public budget deficit, around debt sustainability for each of the next number of years.

And it doesn’t get a whole lot of commentary. But the forecast back in the Summer Economic Statement, was that by 2025 the national debt would be €281.7 billion and the forecast now is €252.2 billion – so €30 billion less of a national debt forecast by 2025, because of the strength of the rebound and the way in which that has then worked its way through and all of the forecast for the next number of years. And these are the kind of big ticket items that don’t really get much discussion or much focus, the €7 billion favourable swing in the projected deficit for the current year, the projected outturn. To be honest with you, we talk about the content of the budget, and 10 million here and 100 million there, but when you look at that overall context and that really favourable dynamic that has taken hold in the economy, and we’re seeing the benefits of that in the public finances, that really is what resets the dial, and puts us into a much stronger and a safer place in relation to recovery and the public finances. And it can be frustrating at times, that bigger picture doesn’t really get the attention or the coverage that I think it deserves. We all haggle over the extra bit in the Budget. But really, it’s the direction that we’re going is the most important thing.

SK: When we were recovering from the last crisis, we had this fantastic triple whammy, we had extremely low oil prices because of shale during the fracking boom, we had quantitative easing reducing our borrowing rates, and we also had a very, very favourable real effective exchange rate. So the economy just took off like a rocket after 2013, 2014, 2015.

MMcG: You are right, but before I move on, there is one further point in relation to the main difference between this budget and the last one. The main difference from where I sit, and from the work that I’ve had to do in the last number of months, is that we have a framework for Budget 2022. And that was really helpful in all of my discussions in the last number of weeks, because cabinet and government had agreed to the Summer Economic Statement and agreed that this would now be the fiscal framework for the next number of years. And so I had an anchor. So when it came to current expenditure growth, the anchor was 4.6 per cent. The capital ceilings, as I said, were agreed in the Summer Economic Statement in July and in the allocations agreed by cabinet for the NDP. And that was really helpful and necessary in the context of the discussions and the negotiations I had. Whereas last year, we had no anchor because we no Summer Economic Statement: we didn’t have a mid-year expenditure report even. So now the government has a fiscal strategy. And thankfully, since we adopted that fiscal strategy, we are in a much better place, but we took the very deliberate and strategic decision not to revise the framework despite that very positive change in the underlying budgetary position. And that’s for a number of reasons.

We believe that not having a deficit of €20 billion doesn’t mean you have more money to spend – you’re still going to have a deficit of €13 billion. It doesn’t mean more cash was freed up to spend. And also, we have a spending rule now. So irrespective of the economic conditions, and the tax revenues, we have a spending rule that anchors growth in spending to the underlying growth trend rate in the economy. And so that has been really helpful as well. And I think that brings a certain discipline, to be frank about it. And I think it is a discipline that is helpful when you are on the side of the table that I’m at when there are lots of ambitions across government departments and lots of expectations, lots of commitments have been made. Having that constraint is helpful, otherwise it becomes really difficult to try to contain it into a responsible overall approach to the budget.

Anchoring spending

SK: I was going to ask you about the development of the spending rule. I agree with you – as somebody who teaches public financial management, I think the development of the spending is a very good thing. And can you just tell us a little bit about the development of it? Where does it come from? What was its genesis? Was it difficult to bring in? Because it has not, to my view, received the kind of coverage that it deserves. It is a genuine innovation in fiscal policy in this country.

MMcG: It is consistent with the fiscal rules which have been stood down for now, but which will come back, probably, in a different form. And secondly, it is something the Fiscal Advisory Council have been advocating, and we do listen to them. We do our very best to take on board the constructive points they always make, and they have been consistently making this point about having an anchor in relation to the growth on public spending. And so that is what informed thinking by Minister Donohoe and myself and our officials as we were preparing the Summer Economic Statement, and it just provides a foundation for your budgetary strategy for the next number of years. I think when you’re trying to run the finances of the country, you need certain pillars on which you build that strategy. And I think the spending rule is a key pillar.

The art of saying mo

SK: Tell me a little bit about the decisions you didn’t make. What would you have liked to have done under other circumstances? The spending rule provides a very, very neat, clean decision criterion around which to frame choices. But you’re the minister, you have to make choices. You’re literally the Minister for spending, you must choose what to spend on and what not to spend on? Can you give us a sense of the kind of decisions you didn’t make? So, you said, ‘No, we’re not gonna do that, or we’re gonna do less of that.’ And, under other circumstances, what would you like to do?

MMcG: There are trade-offs. And because we had that overall constraint, that was sort of to the fore of my mind every time I was sitting down with a colleague to listen to their ambitions, and to engage with them, and to try and find a way forward. And having that constraint meant that you couldn’t go over that percentage growth with everyone or else you wouldn’t achieve your your aggregate ceiling. So in making those decisions, and I think when you look at the expenditure book, because there is a treasure trove of information in it, you will see that certain government departments did get a higher percentage growth in expenditure next year, but they’re all for very particular reasons. For example, childcare got an 8 per cent growth in spending next year because we are instituting a very significant reform and putting in investment into a core funding model of childcare to try to stabilise the sector and to ensure the staff can be better paid. There’s a joint labour committee process underway now that to invest in the National Childcare Scheme and ensure that that sector is on a more sustainable footing.

I look also, for example, at the tourism, hospitality and the arts sector. Again, the increase there is about twice the overall rate of growth in spending. But that’s because of the need to repair that sector and the damage that has been done over the last 18 months. Now, we’re able to do a lot more under the temporary Covid spending as well, but some of it is core, and we recognise that it is core. So that was also a key priority in relation to the budget.

And of course, housing. So primarily, it’s on the capital side. It has the largest capital budget next year – direct Exchequer capital funding of €3.4 billion. But also on the current side because it is a government priority. In relation to health, the rate of growth next year in core is about 5.3 per cent. But that’s because they are essentially getting to keep the large increase last year which they haven’t fully spent. So health had a budget last year, including Covid, of just over €22 billion. It’s coming in with a very similar figure for 2022, but the composition is different. It will be less COVID, a little bit more core so that there is a trade off there. So you cannot do everything. Of course, you would like to do more in different areas. But I think that with the money that we have, we have managed to make real progress in certain areas. And I would point to the investment in housing, the investment in childcare, the continued investment in capacity in our health system, for example. And also, I think, even in education and further and higher education, we are making progress. And I’m working with Minister Harris in relation to the core funding model for third level, because that is going to be of strategic importance for Ireland, particularly given that we are now signing up to the new international corporate tax framework.

SK: To make the point on higher education, it strikes me that anything that helps produce an ideas economy is going to be a good thing and that is what universities are for, fundamentally.

MMcG: Just to make the point that the funding going into this sector is is not just under the core normal budget. Minister Harris and his department are getting a lot of funding under the National Recovery and Resilience Plan. There are a significant beneficiary of that, particularly in relation to research. Also, the Brexit Adjustment Reserve will be a source of funding for that department as well over a period of time. And he’s made a bid for funding in relation to the European Regional Development Fund as well. So, there are a number of different pots. It’s not all direct exchequer funding, and he and I are working very closely together now on some measures that we think will improve the underlying funding position.

Housing and cost containment

Michael McGrath

SK: I want you ask you about housing, specifically about cost containment. You’re not just the Minister for Expenditure, you’re also the minister for reform and a lot of this has to do with public spending codes, reform of practices. And I am struck by the fact that we are about to embark a giant capital spending process.

How do you make sure that this doesn’t lend to a more general inflation, which would obviously be a very bad thing for the economy? Specifically how do you make sure that the spending that is done by the state is in some sense cost effective? If you spend €174 million, for example, to get several thousand houses, how do we contain the cost in a sector where we’ve effectively told every actor in the sector what the budget constraint is?

MMcG: The first point is that it’s a positive thing that capital investment is not only being protected in this time of crisis, but also actually increasing over the next number of years. And, when you think back to the last crisis, there was a completely different approach to it, internationally and within Europe, in relation to the policies advocated and the approach of the European Central Bank and so on. But the consequence of that was capital investment collapsed in Ireland, peak to trough about 60 per cent. So where we are now is just a different world entirely. Despite incurring a deficit last year of over €18 billion in the public finances, we’re committing to not just protecting but ramping up the public capital investment programme with €165 billion out to 2030. And you’re absolutely right, that does pose challenges.

There are a whole different set of ingredients that have to go through – the planning process; the judicial process; the capacity of the industry to deliver; the capacity of the public sector to deliver. But I think having a long-term plan gives certainty to government departments, and also to the construction industry. They know what’s coming. Every minister now knows exactly what they have for capital spending up to the end of 2025. So, they can plan and they can deliver projects through the various stages of the project lifecycle, and the construction industry knows how much the state will be spending out to 2030 – we have rolling five-year departmental ceilings.

So, I think competitive procurement is an important part of it. But we need to do more than that. Because what I’m doing in the reforms I’m introducing is I’m strengthening the external oversight and the governance of major projects. And you’ll be familiar with a number of those reforms, including, for example, adding five external members to the Project Ireland 2014 delivery board. It is principally made up of secretaries general across government at the moment, who all do a great job. But I think that we do need another dimension to the type of experience and background that is brought to that board to be frank. And so we will have an open competitive process now to get people who have private sector experience, international experience of delivering major public capital projects. So that’s one reform.

And we’re also setting up a new major projects advisory group to advise my department, because we have departments coming at us from all angles with lots of proposals. We have good capacity here. But we need to strengthen this. And so this group will be set up to support our work, and then to support the work of the sponsoring departments. There will be a panel of external experts, and the departments will have to consult with them at two key decision gates in the project lifecycle. And that will give us comfort that project have been comprehensively assessed. Because when we look at the projects where we’ve had difficulty, I think the fault very often lies in just not getting the homework done fully at the beginning. If it’s done properly, I think you can avoid a lot of problems down the line. So, I think those are important reforms in relation to the public capital programme.

I am keen to try to enhance the profile of the spending review process, which we have in this department as well. A lot of spending review papers are published. And to be honest, I’m not sure to what extent they’re really followed up on subsequently by line departments. So, what I what I’ve stopped is the practice of all of them being published on Budget Day. On Budget Day, people aren’t looking at spending review papers, they are looking at what is in the Budget. So we have spaced out the publication of them, just to try and give them some profile, and to start the debate in relation to many of them. And they were doing a range of value for money initiatives as well. We’re also intensifying our performance budgeting. So, we’re looking at outputs, we’re measuring outcomes and that can feed into future decisions.

Value for money

SK: One of the things that I have certainly been calling for at least five years is performance budgeting. You are not going to get adequate reform of the fiscal system unless you have some feedback between inputs and outputs. And you need some kind of performance budgeting to make that happen. I’m genuinely delighted to hear that’s the case. Specifically as the state expands into new areas in a much bigger way. You could end up in a situation where, very quickly, value for money might go out the window, and also, people may be less willing to contribute more in taxes, if they’re not assured that their money has been spent well. There is a brilliant spreadsheet on your website – on the department’s website – showing what the status of capital projects actually is, and most of them come in fairly well under budget. It is not the that the media tend to take a look at.

MMcG: I should acknowledge that the public spending code has been strengthened in recent years, Minister Donohoe who did strengthen it. It is something we’re continuing to review, and we will strengthen it further. And the Public Works contract is something that the construction industry would take issue with, because they would regard it as quite inflexible at a time of rising costs. And there is, as you know, a provision that it’s essentially fixed for 30 months, there can be no price variation within the first 30 months. And of course, the vast majority of Public Works contracts, the duration would be less than 30 months, it would only really be for mega projects that you would have a duration of longer than two and a half years. So, I think the state is doing a better job now to protect its interest. We do have to balance that with the commercial realities facing the sector as well. And there is a very significant challenge now in attracting labour. And we are conscious that materials and international supply chains are having an impact as well. But it will come as no surprise to anyone to hear that the first priority here is protecting the interests of taxpayers. But we do want to get our public capital programme delivered. And so we have to find the right balance where we can protect the interests of taxpayers, but at the same time deliver the projects. And that is a balance that we’re always keeping under review.

Striking a budgetary balance

SK: What principles do you employ when you go about striking such a balance in the budget as a treasury minister?

MMcG: So, our discussion during the estimates process is not just about how much money is needed, or how much money we can give. So, when I engage in budget negotiations, we absolutely spend as much time discussing policy as we do the financial resources required, because we have to be satisfied in this department that, if we’re funding a measure, it has to be the right policy, that it can be delivered, and that the taxpayers will get value for money.

And so one of the questions I will always ask my team here is, how much engagement has there been in relation to this policy proposal. And if it’s a last-minute proposal that we don’t believe has been fully fleshed out, then quite frankly, we’re not going to allocate the money to it. So, it’s not just a discussion about money. We are not just bean counters in this department, we do have a key role as guardians of the public finances, but we do have to protect the overall priorities of government, and make sure that those are delivered upon. And so this department and the Department of Finance are at the centre of everything in government, because when it comes to all of the interaction with the different line departments, it comes through here. So I had in the estimate 18 government departments where budgets had to be agreed. That involved 45 votes, separate budget categories.

So it was a pretty, pretty intense period over the last number of weeks to get all of that over the line. And I do think that we need to try and do a better job of telling the story about what’s involved in framing our budget. And also, just to give, you a sense of the amount of detail that is now publicly available. In it, there’s so much information there, which is of use to, you know, researchers, analysts, students, members of the public, you know, a whole range of public bodies, to see exactly how we spend our money, because it’s all there. And so I’m going to do all I can in the period here, just to try and raise the profile of the process, and the amount of information that is available, because you know, people who pay their taxes, and not just income taxes, but people who pay VAT, pay consumption taxes, who may not have a taxable income, they’re all taxpayers. And they deserve to have as much information as possible about what we’re doing with our money.

Listen to the full interview on our audio platform.