Public finances are, so far, holding up reasonably well. Tax revenues are rising on the back of economic activity and higher prices. For instance, as prices rise, so do indirect taxes. This has been coupled with reduced expenditure – driven mainly by the withdrawal of pandemic supports and the continued fall in unemployment.
All this makes for an ‘inflation dividend’ – the unanticipated upturn in the Exchequer’s balance sheet.
In April, the Government estimated that it would run a deficit of €1.9 billion this year. The recent ESRI quarterly commentary now estimates the Government will actually have a €1.6 billion surplus. Next year, the think tank estimates a surplus of €3.2 billion – nearly three times what the Government estimated. There is also the Covid contingency fund which the government set up to meet potential ongoing pandemic costs. This €4 billion fund has not been exhausted.
We should be cautious about any estimate. Such is the volatility in the economy and the potential for further disruptions, projections can swing significantly even within a few weeks. However, whatever about the numbers, it is reasonable to conclude that public finances are moving into surplus much sooner than expected.
So what do we do with this extra money? We could pay down debt but our debt levels are already average by Eurozone standards and interest rate increases won’t really start impacting the Government’s balance sheet until the end of the decade.
We could set up a rainy-day fund, especially given our fiscal over-reliance on a handful of multi-nationals. However, we already have a rainy-day fund – in the form of cash balances held by the Government. While much of this cash is used as a buffer for cash-flow purposes, we held €27 billion at the beginning of this year.
Given the debilitating impact on households and businesses from the current inflation crisis, the €1.6 billion projected surplus should be treated as a ‘dividend’, to be paid out in anti-inflation measures. That’s the budget for relief measures.
This doesn’t tell us what are the most efficient and socially equitable measures to take but it gives us a price tag:
- Increased social transfers, including significant increases in the Working Family Payment thresholds. The Back-to-School Allowance could be extended to all households. There could be a significant increase in prescription medicine subsidies, coupled with drug price controls.
- Resources to reduce the cost of public services would also play a role in this dividend. A reduction in public transport fares (why not try, even on a pilot basis, the German example where €9 per month gets you free access to all public transport), and a 50 percent cut in childcare fees (cheaper than you think) would be just two of many measures.
This dividend should be seen as additional to measures the Government would have implemented regardless of the crisis: social protection and public service increases, inflation-indexing tax thresholds, public sector pay, etc.
For those who worry about the impact of a €1.6 billion anti-inflation package on public finances, they needn’t. The €1.6 billion is just the gross cost. Every expenditure drives up tax revenue. For instance, an increase in social transfers increases income tax revenue (social insurance benefits are taxable) while boosting consumption taxes. If we reduce childcare fees that money doesn’t go into a black hole. Households will spend most of it in the rest of the economy, again driving tax revenue. The cost to the Exchequer of a €1.6 anti-inflation package will, in net terms, be considerably less.
But we need a more invigorated debate on the current crisis. It needs to go beyond just cash transfers, though that is an important element. The role of wages, price controls and the transformation of public services into universal basic services should be part of any sophisticated, multi-prong and medium-term strategy.
And that should start immediately and not wait for the October budget.
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