We live in a world of overlapping, interacting crises. There is a word for it: polycrisis. And it is this perpetual state of polycrisis that has defined Budget 2023 – and the previous two budgets before.

Two years ago, after a decade shadowing budgets from the opposition benches, Michael McGrath co-authored an unprecedented €17.75 billion budgetary package. The budget was delivered against the backdrop of a global pandemic and was designed to sustain employment during widespread economic upheaval.

It should have been a generational budget in terms of its scale and scope. However, the crises have kept coming.

Earlier this week, McGrath, the Minister for Public Expenditure and Reform, was back on his feet announcing more budgetary largesse – the package was less than two years ago, but still totalled a whopping €11 billion, some €7 billion of which will be baked into permanent expenditure. On this occasion, the crisis related not to a pandemic, but to the spiralling cost of living, fuelled largely by increasing fuel prices.

It is the sort of budget that McGrath, a pragmatic conservative by nature, would never have imagined delivering. But, due to mammoth tax receipts from a small number of pharmaceutical and technology multinationals, it is a budget that has still delivered a surplus.

The budget contained a €4 billion package of one-off measures aimed at alleviating surging inflation, plus a rise in allocations to most departments. The rainy-day fund has been rebranded as the National Reserve Fund and replenished with billions from the state coffers.

In keeping with previous budgets, the size of the state has been increased yet further, leading to questions about how it can be funded if the gold rush of corporation tax runs dry.

And the crises keep coming. Within a day of the budget being delivered by McGrath and his colleague, the Minister for Finance Paschal Donohoe, the mini-budget in the UK had almost overtaken events, triggering a rush on sterling and the intervention of the Bank of England.

In his speech, McGrath said that it was “a budget for its time, a budget that seeks to respond with unprecedented resources, with a breadth of measures, and a speed of execution we have not seen before”. However, what about tomorrow’s problems?

We live in a world of overlapping, interacting crises. And those crises are impacting budgets like never before.

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We met on Wednesday afternoon, just over 24 hours after McGrath had delivered his speech on the floor of the Dail. He has carried out the usual round of radio phone-in shows and dealt with the customary budgetary backlash.

However, in his office, located on the second floor of the Department of Finance, he is thoughtful and reflective. Ireland does not do a state-of-the union style address. Instead, the motivations and aspirations of government are contained within the annual budgetary speeches.

This is McGrath’s third budget as Minister for Public Expenditure and Reform. And it could well be his last. The imminent cabinet reshuffle is expected to send him a floor down to the office of the Minister for Finance. The apprenticeship has been long, and due to the issue of Pascal Donohoe’s presidency of Eurogroup, his promotion will be slightly controversial.

But throughout the interview, he continually stressed that the government required, and depended upon, a genuine working relationship between the Department of Public Expenditure and Reform and the Department of Finance.

Over the course of a lengthy interview, we discuss these topics and many more – from managing the public finances in a time of polycrisis to the capacity deficit that restricts the capacity of the state to deliver crucial services.

We begin, however, by talking about the increased size of the state – and whether the state has the ability to pay for it.

Ian Kehoe (IK): The State has got incredibly bigger and more muscular – the €11 billion package contained €7 billion of permanent spending. Amid concerns over corporation tax, it begs a question: how do we pay for that in the longer term?

Michael McGrath (MMcG): The State can only grow in a managed and controlled way, and it has to grow to meet particular policy objectives. And when I look at, for example, the size of the public service, it has grown considerably in recent years. At the end of June, it was 370,000 full-time equivalents. And if you look back just a short few years to 2016, it was about 310,000. And four years ago in 2018, it was 330,000. So, by any measure, that is quite a significant scaling up of the capacity and resourcing of the public service, that we do have a growing population – we have a need for strong and responsive public services all over the country.

But all of this has to be paid for, and it has to be paid for through a sustainable taxation base, and by ensuring that we protect our economic model, and that Ireland continues to be successful. Of course, we don’t control all of the levers, and I’m sure we’ll go on to discuss some of the wider economic context.

But this has to be controlled and managed. In terms of public expenditure, we are increasing current expenditure by about 6.2 per cent next year We have made a temporary adjustment to the spending rule that we adopted in the medium-term budgetary strategy – I’ve noted what the Fiscal Advisory Council have had to say on that issue.

If you look at the last two years, core current spending last year grew by 4.6 per cent – this year it’s 6.2 per cent, so that’s a total of 10.8 per cent, the combined inflation for the two years is approaching 16 per cent. So, we have had to strike the right balance between providing support for people, recognising at a time of such high inflation, the state does have to spend more money, and get larger in terms of its response – but not drive inflation higher, and not embed it in the system.

IK: But you can pay for that increased spending this year because of a surge in multinational taxation – and there’s significant doubts over that. The Commission on Taxation got a pretty muted response when it came out and proposed a range of increases in taxes. Do you think we’ve had a mature conversation over how we’re going to pay for this enlarged state?

MMcG: I think the truth is, there aren’t many forums left where you can have that mature conversation about what size the state needs to be, and then how we’re going to fund it. And it does fall to serious politicians and policymakers to consider these big-ticket decisions about the direction of the country, and the challenges that we face. We know that our demographics are changing, we know that Ireland remains a very attractive place to live, and we have net inward migration now into our country, because we have had such success economically – and the quality of life in Ireland, comparatively, is really good.

And if you look at health outcomes, and you look at the way in which inequality has been reduced and poverty has been reduced, by any broad measure, Ireland is a successful country. We have to make sure that we manage this sustainably – there is a limit to how big the state can become, and that limit is how much tax you’re prepared to pay in order to fund that state. And I think there is a limit to how much tax that individuals and businesses are prepared to pay. And in return, I think part of the contract we have with all taxpayers is that the public service has to deliver, and has to deliver services efficiently. And we’d a huge setback over the last couple of years with Covid, and I think we are adjusting now and coming out of that. And we have work to do, to make the provision of services more efficient, and to get value for money in areas such as healthcare.

Getting value for money

IK: That leads me to where I want to go, value for money particularly in relation to health. And I think there is a feeling out there, and that are we not getting value for money in terms of healthcare. How can that be addressed?

MMcG: I think we need to get some basics right – we need to, first of all, have good financial reporting systems, so that we are getting accurate, real-time information about expenditure and health. And that investment will be made by the health service, so that we can support the effective management of the health budget. In 2023, it will be over €23 billion, in you include the provision that is being made for Covid. Now, while people will understandably criticise the health service, the outcomes have improved – the outcomes in terms of life expectancy, the survival rates for cancer, for cardiac care, for strokes, all have improved. I think in many respects, what we have is an issue around access – and Minister Donnelly now has a fund of over €400 million to tackle waiting lists next year. That includes increasing the use of the National Treatment Purchase Fund – I think we have to use the capacity of the private sector to help reduce these waiting lists, as a priority. So, I think the health service does a lot of things really well, and we saw the way in which it responded during Covid – I think it compares favourably with any public health service anywhere in the world. But there are real bottlenecks around waiting lists, ED departments – that’s something we have to fix. And the resources are there now to do that, and the government is determined to make progress.

Targeted supports

IK: I just want to ask some specific points in relation to this particular budget. Just in relation to the one-off measures, I have two questions. One, were they targeted enough to help the people who really needed it most? And secondly, what happens if we need to go again?

MMcG: In relation to the targeting question, it is a matter of judgement, and everybody will have a different view on that. We have a highly developed social protection system in Ireland, there is a safety net there in our country – that’s something that I think we can be very proud of, and the way it has developed over time. And that has given us the levers to target resources between now and Christmas in particular, to those who are most in need. People living alone, older people, carers, people on disability allowance, low-income working families, through the Working Family Payment, and so on. So, those are all, I think really good, effective, targeted measures.

But we did complement that with wider measures in the form of the energy credits, and then the way in which we’re seeking to reduce costs, where people interact with either a public or a private service, in the area of education, in the area of childcare, in the area of health. And so, I think while those measures relate to particular services, they’re targeted at those services, and at the point where the citizen interacts with that service, they get assistance. If you were to seek to target everything, the first question that would arise is, where is the boundary, where do you draw the line – what level of income do you say, above that, this person or this family doesn’t need any help and doesn’t deserve any additional support? And I think we should be slow to draw conclusions about the true financial health of a lot of people – an individual or a couple could be on quite a good level of income, but their own circumstances might mean they’ve a large mortgage, they’ve a large monthly rent. They may have a child with significant additional needs, high childcare costs. So, I think we have got the balance right, extensive targeting through the social protection system – some universal measures, namely in the form of the energy credits.

But of course, universal measures go to the people who require targeting too, they get them as well, which is often forgotten about – it’s as if only the well-off get them. But I think with a package of that scale, to exclude some people, would first of all be very difficult to do, and secondly, I don’t think would necessarily be fair or reflective of just the true reality that may people are facing, despite their headline level of income.

IK: And the second part of my question, in relation to what happens if we need to do the one-off measures again. You clearly have buffers in terms of a surplus and a contingency fund, but when will you know if more needs to be done?

MMcG: We’ve just delivered Budget 2023, an €11 billion package – we’re not anticipating going again anytime soon. This is a very large package; this needs to see us through for a period of time. It is a budget for all of 2023. But of course, we can’t categorically rule anything out – our experience over the last number of years underlines the need to be agile, and to have the capacity to respond. And it is a really positive thing that everything that we announced in the budget is funded from own resources – we’re not borrowing a cent of it. And I think that is such a significant achievement for our country. Of course, we are conscious, and very much alert to the risks that are there, in respect of the sustainability of corporate tax receipts, that’s why we are starting now to put money away, which I think is the right thing. The first priority in recent years was to eliminate a deficit, to stop borrowing. We’ve done that now, despite the huge setback for our economy and our public finances that Covid represented. Now that we’ve achieved that, we’re forecasting surpluses, we’re putting money away – if we have to intervene next year, it is our assessment at this point that the capacity will be there to do so. But we can’t have a budget every few months, and it’s not our intention to do it. This is a very large package, and we need to implement this now in the first instance.

Energy and data centres

IK: You mentioned the energy package – I think it’s, by my calculations, about 1.5 per cent on GNI*, for want of a better… and that compares to about 2.1 per cent for other European countries. Why was it smaller?

MMcG: Well, it’s on top of what we’ve done so far, which is, the first energy credit and a whole range of targeted measures introduced over the course of 2022. So, even if you… you can forget about 2022, we introduced about a further €1.3 billion of measures, essentially between February and July of this year. So, it has almost been a continuity of different supports, and I think if you add it all up in the aggregate, I think Ireland’s response has been significant. We have made a decision not to go down the road of imposing a price cap, because we simply cannot stand over, with any degree of confidence, an estimate of what that would cost the taxpayer. It is an unlimited liability, in that, we don’t know what will happen to wholesale energy prices. But we are – and we’ve given this commitment in the budget – going to make sure that the companies that are benefiting from windfall gains will pay more tax. And we will await the outcome on Friday of the EU energy ministers’ council meeting. But if there isn’t agreement there, we stand ready to intervene. And the commitment we’ve given is: any additional revenues that we raise from fossil fuel companies, or from non-gas, electricity-generating companies, will be made available to the Irish people and Irish businesses. And that would be additional to Budget 2023.

IK: Will data centre providers be able to claim the Temporary Energy Business Support Scheme?

MMcG: The full details of that will be made available by Minister Donohoe and the Department of Finance very shortly. So, the specific question you’ve asked is not one I can answer, because the full details will be published shortly.

Capital spending and constraint

IK: I want to move on to capital spending, I think it’s possibly gone under the radar a little bit on this one, given the cost-of-living crisis. The increase is relatively modest, and if you factor in inflation, it’s down in real terms. Would you have like to have allocated more?

MMcG: So, a year ago when we adopted the National Development Plan, we published the capital budgets for every department out to 2025. And with the exception of defence, and our response to the Commission on the Defence Forces, we have kept those capital ceilings intact. And I hear the arguments being made, that the budget is not going to be sufficient, given construction inflation – but my experience over the last two years has been that some departments have really struggled to spend their capital budget. Year to date, we are in the order of €800 million underspent.

IK: Why is that? It is evident in terms of the underspend in social affordable housing. Why are we underspending when we need critical infrastructure?

MMcG: Some departments are spending their capital budget in full, and even going beyond. For example, the Department of Education – it is very good at building schools and doing school extensions and so on, and it’s great to see it being done. Because, there are needs there, especially in the area of Special Ed. A lot of it can be traced back to the delivery of major projects in the transport area – we know the major public capital projects that are in the pipeline have been beset by delays over a long number of years. You have to provide the budget to keep them moving, to try and get them to the point where they can move to construction. That’s one area. In housing in the current year, it has been a very challenging year for the sector, with inflation, with supply chain bottlenecks, the difficulty in getting materials. And indeed, the difficulty in getting enough labour to carry out the work. So, it is about capacity – not just public service capacity, but capacity across the private economy as well. And similarly, the third area that I would point to would be in retrofitting, and our journey to decarbonise our society, our homes, our energy systems.

Again, we are trying to build up capacity in the private sector, to help us spend all the money that we are providing in that area. So, many departments are spending their capital in full, others are not, at this point in time. But I do want to see a situation where, if we have some departments that are able to spend their budget and still have projects that we really need to see delivered, that we would be in a position to make funding available. There’s little point in having a large underspend at the end of every year, and that’s what we’ve had in the last two years. And I don’t want to see that continue into the future.

Budgets in an era of polycrisis

IK: I don’t think you would have anticipated when you came into this office, spending so much money over a number of years – between Covid, a cost-of-living crisis, Ukraine, everything else. But it seems we now live in an era of polycrisis. Do you worry that we are not investing in longer term structural projects. With the financial firepower that you’ve had, do you think there is an opportunity missed?

MMcG: Well, I would argue that the issue that we’ve just covered there, of public capital investment, is one where we are looking to the future. We made a very conscious decision to prioritise capital investment – we were underspending, relative to other European countries, and we’re now very much in line with and heading to be above average, in terms of our public capital investment programme. And that is the right thing to do, and that means investing in infrastructure all over the country – and that does futureproof us, especially by investing in climate and renewables, and the decarbonisation of our public transport system, just to name a few examples. So, I think that that is one area. And then we are, I think in a very mature way, making a significant start in further and higher education, research, innovation and skills, that whole area, by providing funding to address what we acknowledge is a deficit in core funding.

And we’ve faced up to that – my department, Minister Harris’s department, have worked very closely together to identify that there is a funding gap there that needs to be bridged. It is just over €300 million, we’re making a start in 2023 by helping them to deal with some legacy issues, and giving them €40 million then for new core funding next year. So, I think that we are addressing those longer-term challenges by investing in education in particular, both primary, secondary, and indeed beyond.

IK: To give an example: capital spend on housing is €2.3 billion. That would build about 5000 to 8,000 homes – but we probably need five times that.

MMcG: But you couldn’t build five times that number of homes, that’s the reality.

IK: So it’s the capacity issue?

MMcG: There is a limit to capacity, which is in part because, for a decade or so, very few new homes were being built. We’re now very dramatically increasing the supply of labour through apprenticeships, investing in that whole area. The number of apprenticeships has increased very significantly in recent times. So, there’s a lot of good work being done there to bring a pipeline of people through, who can help us with the human capital, to build the homes that we need. But I do hear other parties say, you know, we’ll build 20,000 homes a year – no, they won’t. You can double the budget, it doesn’t mean that that will lead to double the number of homes. Minister Darragh O’Brien and his team are doing great work, but the reality is, this year they will have an underspend in capital. That’s not because they don’t want to build more homes, they’re building as many as they possibly can. Giving them more money, doesn’t mean you build homes more than they can.

Risks, sterling and uncertainty

IK: In relation to risks, and we spoke about it at the top – and obviously corporation tax is a risk that everyone’s been looking at. What are the risks that were really weighing on your mind as you prepared this budget?

MMcG: The key risk is the global economy, and then all of the elements of that are intertwined – the war in Ukraine, an energy shock, inflation, reduction in global demand. So, that’s the area where there is the most risk for Ireland, as a small open trading economy – you can pick any one of those things and say that’s the greatest risk, but the truth is that, they’re all inextricably interconnected. And nobody can predict with any degree of certainty how the next 12, 15 months will play out. We’ve become used to volatility and living with uncertainty – and I think the main learning for us as a country is the need to be agile. We have to be able to respond to events that will develop, they will be unforeseen – but certainly, I think the main risk for us is the external environment, and all of those elements that are then having a direct impact on Ireland, energy, inflation, global demand.

IK: Are you concerned about sterling and the pound, and the uncertainty in Britain?

MMcG: We try to avoid commenting really on another country’s challenges – because God knows, we’ve have challenges before, and we appreciate the difficulties that have been created in recent days. Of course, we would be concerned about any destabilisation of the markets, and indeed of the UK economy – it is at country level, our largest trading partner. And any negative shock to the UK economy will inevitably have an impact on Irish exports and SMEs. So, there is an interdependency there, we’re acutely conscious of – so we certainly hope that the challenges that are quite acute at the moment, will settle, and be addressed over the days and weeks ahead.

Legacy

IK: You will probably be in a different office this time next year. When you reflect upon your time in this office, what are your thoughts?

MMcG: Well, the way in which this department and the Department of Finance work together, is central to the cohesion of government and the stability of government. If you have a Minister for Finance and a Minister for Public Expenditure pulling in opposite directions, or not working closely together, and the same is true at official level, the government simply doesn’t function. This building was all one department but for the last 11 years, it has been two departments – but they are just so interdependent, so that’s one take-away, certainly. I’ve huge regard for the people here; this is a brilliant department. The budget operation is an incredible machine to see it up close, to see how a budget is built. And the amount of effort that goes into it is quite something. I have at a minimum, a number of months left in this department – we’ll see what happens after that. But there are things that I will want to advance, we have ethics in public office reforms that we want to bring forward to government. We have lobbying legislation ready, which I want to get enacted. We have a review of freedom of information, which will be of interest to you and many of your colleagues. There are reforms that I think are badly needed there, and it will be with a view to not narrowing or restricting FoI, but making it more efficient, and more accessible and more supportive. So, I want to get that done. And also, on that question of public service delivery, and responsiveness, communications with the public, is an area that I’m going to give my time and attention to in the coming weeks, to make sure that public service bodies are responsive and engaging with the Irish people, when contact is made and is needed.