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Analysis What should Michael McGrath look to achieve as he moves to the Department of Finance?

Ciarán Casey of University of Limerick looks back at previous ministers for finance and outlines any possible challenges ahead.

The dust has now settled after the long-expected Cabinet reshuffle and the new administration will be turning its attention to the many challenges on their desks. No doubt, as expected, the greatest challenges will be faced by our Housing and Health ministers.

Very few changes can happen in any department, however, without a competent team in place at the Department of Finance. Here, economics lecturer Ciarán Casey of UL looks at what Michael McGrath (the predicted successor to Paschal Donohue) must do to keep the ship afloat as he takes on this most important portfolio.

MANY OF THE changes that most ministers make take years to have any impact. For the Minister for Finance, however, one key metric decides the outcome of his (and in Ireland, it has so far always been ‘his’) period in office from the very first year: the rate of current expenditure growth.

Current spending includes ongoing liabilities like salaries and welfare payments, while capital spending is on fixed assets like buildings or roads.

There was a lot of discussion about restraining current spending growth in policy circles in the 1990s. Ruairi Quinn and the Rainbow Government (1994-1997) pledged to keep it to 2.5%. The Fianna Fáil and Progressive Democrat Coalition (1997-2007) set a target of 4%. Quinn was critical of his own Government for its failure to keep within this threshold, though its sins were minor compared to what followed.

In 2001, current spending grew by an eye-watering 17%, as Charlie McCreevy tried to offset the impact of the international downturn.

Government spend

Why does this matter? Firstly, spending growth is compounded year-on-year. The difference between 4% and 8% might not be enormous as a one-off, but if the latter figure is sustained it means a doubling every nine years.

Secondly, current spending is unlike capital spending because it is notoriously difficult to cut once it has been allocated. Even during the period of severe cuts in the late 1980s, all of the work was done on the capital side. In 1988, capital spending was cut by an enormous 23%, while current expenditure continued to grow (albeit marginally) every year.

The reason is political rather than economic: current spending tends to create its own interest groups, which will fight tooth and nail to retain the allocation.

The data demonstrate both points unambiguously. Look at the figure below, which shows the current spending and income of both central and local government over the past quarter-century.

Note the inexorable rise in spending. Even the deep recession of 2008 produced only a minor blip. Spending in the aftermath of 2008 was essentially flat until 2015. By contrast, it grew from €88bn to €124bn between 2016 and 2021. After inflation, this represents growth of over 30% in just six years.

Much of this additional expenditure was justifiable given the repeated crises since 2016, particularly Covid-19. But as a trajectory, it is simply not sustainable. Even more troublingly, it has been funded in significant part by bumper corporation tax receipts, on a scale that nobody predicted in advance.

The salient fiscal lesson of the millennial property boom is that large revenue streams can evaporate alarmingly quickly. Given that so much of our corporation tax comes from a handful of companies in two sectors, the comparison quickly becomes uncomfortable.

Current Expenditure and Income of Central and Local Government (CSO)

current_income_and_expenditure_of_central_and_local_government.1670952655663

None of this means that spending should be reduced, which is probably close to impossible politically. What it does mean, is that the new Minister has a serious job on his hands to reduce the rate of increase to something more sustainable. Given the political backdrop, this may seem naïve.

Ministers will rationalise large spending increases on the basis that they can only do anything meaningful in Government, and that the opposition would be even more reckless. Garret FitzGerald made exactly this argument when he sided with Labour over his Finance Minister, Alan Dukes, on the level of the 1983 Budget deficit. FitzGerald- understandably based on past performance – expected that Charles Haughey would throw all caution to the wind if returned to Government, and seriously distrusted his judgement on Northern Ireland.

Of course, Haughey defied all expectations when he finally returned to office, showing real resolve to tackle the fiscal crisis. All this has far more resonance today than an incoming Minister for Finance might like.

Ciarán Casey is an economics lecturer at the University of Limerick. He is author of ‘The Irish Department of Finance, 1959-1999′ (IPA, 2022) and ‘Policy Failures and the Irish Economic Crisis’ (Palgrave MacMillan, 2018). 

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