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Is housing the 'big winner' from the Government's Summer Economic Statement?

Housing looms large in the Government’s budgetary thinking at the moment.

Image: Eamonn Farrell

THERE’S NO DOUBT that the Government’s new medium-term budgetary strategy is informed by the political and social fallout from Ireland’s spiralling housing crisis — but to what extent does it tackle the problem?

Published yesterday, the Summer Economic Statement (SES) sets out the broad contours of what October’s Budget will probably look like and also how the Government will approach the next few budgets.

Normally, the SES — published each summer since 2016 — has stuck fairly closely to the forecasts and predictions set out in the Stability Programme Update (SPU) published in the first quarter of the year.

But yesterday, the Government ripped up many of the projections from April, pencilling in stronger than expected growth for 2021 coupled with notable increases in borrowing and spending in Budget 2022.

So what’s behind the sudden about-turn and exactly how much of a gear shift is it?

Let’s take a look.

Housing

Central to the Government’s messaging around this year’s SES is the extra money allocated within it for housing provision.

“It will be the case that housing will be the big winner because we recognise that this is a top priority across society and an absolutely key priority for government,” Minister for Public Expenditure Michael McGrath told a Dáil committee today.

Except, crucial to understanding the figures, is that there isn’t any extra allocation specifically for housing.

What yesterday’s statement details is a commitment to forking over an extra €1.1 billion in Budget 2022, compared to 2021, on what’s called ‘core capital expenditure‘.

As highlighted by Sinn Féin finance and public expenditure spokespersons Pearse Doherty and Mairead Farrell today, that figure falls to around €800 million when allocations to the Brexit Adjustment Reserve — a European Union instrument designed to offset the damage from Brexit — are taken into account.

In plain English, capital, as opposed to current expenditure, refers in this context to spending on longer-term infrastructure projects, including housing. Current expenditure — in other words, spending on the State’s day to day running costs like health and education — is also in line for a boost but let’s just focus on capital spending for the moment.

That €1.1 billion (or €800 million) increase will bring core capital expenditure to nearly €11 billion next year, up from €9.8 billion in 2021.

In Budget 2021, roughly €2 billion of that €9.8 billion was earmarked for spending on social housing, a figure that the ESRI said recently needs to be doubled if the Government wishes to get a grip on the housing crisis.

But we don’t know exactly how much the Government plans to allocate specifically to housing in Budget 2022.

We won’t have a clear idea of that until ministers agree upon and publish the ‘Housing for All‘ strategy on 26 July and then that will have to be detailed further in Budget 2022.

So housing might be “a big winner”, but we won’t know for certain for a couple of weeks.

The Government has also allocated up to €500 million in each of the next four Budgets to go fund tax cuts.

Deficits

Whereas in April, the Department of Finance projected that Ireland would essentially be running balanced budgets by 2025, the SES indicates that will not be the case.

Now the plan is to run larger deficits than previously expected each year until 2025.

The deficit for 2021, for example, has been revised upwards from €18 billion in the SPU to over €20 billion. In 2022, it will be €14.4 billion rather than the previously projected €13.6 billion.

But in case you think Donohoe and McGrath have suddenly changed their political stripes, worry not — the SES makes a clear commitment to reducing the deficit over time.

“We cannot keep financing large deficits,” the ministers warn in the document.

“With a public debt-income ratio that is now amongst the highest in the developed world, borrowing beyond the short-term increases our vulnerability and depresses the living standards of future generations.”

Each annual deficit between now and 2025 will be smaller than the previous, according to the document, concluding with a €7.5 billion shortfall by the middle point of the decade.

“Furthermore,” it states, “the Government would only be borrowing for capital purposes from 2023 onwards” as opposed to borrowing to fund current expenditure like the Covid supports.

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Borrowing

How exactly to fund these spending increases is the key question.

Recently, the ESRI recommended borrowing an extra €4 – €7 billion per annum to boost expenditure, particularly on housing.

This would be prudent, the institute suggested, because it’s essentially never been cheaper for Ireland to borrow money thanks to a combination of European Central Bank monetary stimulus and projections for the growth of the Irish economy.

Those projections have only improved since April’s SPU with the Government now pencilling in GDP growth of nearly 9% this year, up from just 4% in the spring.

Based on the summer statement, it seems Donohoe and McGrath have taken the ESRI’s suggestion on board to some extent anyway.

Overall, the Government will now borrow an extra €18.8 billion than expected over the coming years. €4.4 billion of that has been earmarked for capital spending.

“This increase is justified given the critical role that capital investment has to play in delivering on our economic, social and climate priorities,” Ministers Donohoe and McGrath say in the foreword to the summer statement.

 

 

 

 

 

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