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The concern Ireland’s €10bn surplus could turn from a ‘good problem’ to a bad one

AMERICAN CRIME DRAMA The Wire isn’t evoked enough in Irish current affairs.

One scene feels especially relevant to the current political debate.

Ambitious gang leader Marlo Stanfield is talking with an older advisor about his plans to overthrow his rival and become the main kingpin in west Baltimore.

After being warned about the trials and tribulations of staying at the top, Marlo quips back: “Sound like one of them good problems.”

WireLover2 / YouTube

That’s essentially what the government faces now – a good problem.

Bumper corporate tax revenues have left the state with a massive surplus. The exact amount is yet to be finalised – most estimates expect it to end up between €10bn this year.

In the short term, the corporate taxes are expected to keep rolling in. 

The government previously predicted surpluses would amount to €65bn in the four years between 2023 and 2026, inclusive, although it has since cautioned this number will be revised down somewhat on Budget Day. 

Regardless of quite how many billions the eventual figure comes in at, the point is that Ireland has a significant wad of unexpected cash.

The question now becomes how such a windfall should be spent. Budget 2024 will give the first clear sign of what exactly the government’s plans are.

The problem areas the money could go to are manifold. Housing is in a state of perma-crisis, while there are endless demands for increased support during a cost of living crunch.

Amid this backdrop, the debate over the surplus comes down to – should the windfalls go towards long-term spending (ie, be treated as one-off gifts from the gods and invested/spent as such).

Or – short-term spending (ie, increasing day to day spending or funding tax cuts), as the government eyes an ever-nearing election.

On the ‘sensible’ side, there’s the boring stuff, like paying down the national debt.

Ireland’s debt is currently around €225bn, with annual interest payments of around €3.5bn.

Using some of the windfall to pay down the debt earlier could further shrink those interest payments and free up extra money elsewhere.

Potentially sensible to safeguard against higher interest payments in the future. Not really the sexiest proposal, but potentially quite a beneficial one.

Slightly more interesting, although still very much on the ‘sensible’ side of things, is establishing essentially a sovereign wealth fund.

The Irish Fiscal Advisory Council has argued for this option. The organisation says, if invested properly, in the coming decades the surpluses could generate annual returns running into the billions.

This could then be used to fund the state pension as Ireland’s population ages significantly in the coming decades.

This is likely one of the best ways the surplus could be used. The idea is the fund would become self-sustaining – you could use the returns from it every year without touching the principal, giving the country an extra source of money for future generations.

The government has indicated it will put some money towards this option, as well as investing in infrastructure. 

This could also be a good option – infrastructure such as an expanded Luas provides benefits for decades, while cutting projects in down times tends to backfire. Look no further than Metro North (now rebranded as MetroLink). Shelved during the financial crisis, the estimated costs for the project have now ballooned. If spending had been maintained, it would likely already be finished.

But long-term planning doesn’t tend to get the hearts of voters a-flutter. Or at least, so the government thinks. 

It figures that people want to feel more immediate benefits of the many extra billions analysts constantly talk of supposedly sloshing through the state coffers.

The most obvious ways this can be done are by cutting taxes and boosting public spending.

Again, no shortage of proposals here. Proposals kicked around in this area have ranged from boosting the state pension to tax cuts worth €1,000 for those on ‘average’ wages.

There is merit to this as people grapple with rising inflation and interest rates, although it should likely be targeted towards those struggling.

However, the risk is once spending on a measure such as a tax cut is introduced, it is very hard to reverse. No politician likes raising taxes. The fear then becomes we commit to a bigger budget which we’ll have trouble financing if something ever happened to the state’s corporate tax take.

Despite ministers constantly talking about ‘prudence’, this has often been done in previous years. 

The government breached its own spending rules last year and will do the same this year.

This issue is underlined by the fact that, if it wasn’t for the unexpectedly high corporate tax receipts, the Irish state would almost certainly have recorded a deficit last year.

To reiterate – the problem over how to spend the surplus is a dream one for politicians.

Any government under the sun would happily choose worrying about how best to spend an unexpected windfall over figuring out where to cut spending.

But dreams can quickly turn to nightmares.

The worst case scenario – the surpluses are used to fund big increases in day-to-day spending such as health or tax cuts. Then, in five, 10, or however many years, the corporate tax receipts stop rolling in. 

Something similar happened during the Celtic Tiger, when stamp duty plunged and blew a hole in the government’s budget.

All of a sudden, the state would then be left with a massive bill and few options to pay it.

While there’s no hint of that now, a good problem could still turn to a bad one if the surpluses are frittered away in ‘good’ times without setting us up properly for the bad.