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What to do with the surplus? Pay back our debt

There’s a paradox in the fact that during a major cost of living crisis, the Government’s bank balance has rarely looked better. The Government announced yesterday, with no little pride in itself, that it will take in fully €12billion more than it spends this year. At the same time, the Irish League of Credit Unions reported last month that “Irish consumers remain concerned and cash-strapped”.

On the face of it, this is simple bad governance: We have Government money piling up in enormous mountains of cash while the people who fund the Government – ostensibly for the purpose of serving them – struggle to meet their basic needs in terms of electricity, fuel, and household supplies.

That, of course, is not how politicians will think of it: If you are a Government TD, then the public surplus will not be thought of as what it is – public money – but will be thought of instead as an election war chest. There were murmurs over the weekend that the Government is considering a slightly early election at about this time next year, which is just about perfect timing if you’re thinking of an enormous giveaway budget at the end of this year, allowing time for all the goodies to filter down to the electorate.

The problem with this is the perverse incentive it creates: In a way, it actually suits Government for the public to remain cash strapped and miserable throughout 2023, so that any splurge feels even better in 2024, and so that an artificial “we have turned the corner” narrative can be created.

And yet there are problems, too: It is tradition in Irish politics that any euro that gets spent by the Government once will get spent by the opposition, in their press releases, at least three times. The Government will find it harder and harder to cite economic pressures as the reason for various underdeliveries in housing and health when it has an enormous surplus just resting in its accounts, with Sinn Fein on the sideline promising to spend that money to solve every problem under the sun. At some point, when you have piles of money and piles of problems, the public might start to wonder whether it’s not incompetence, rather than limited resources, that explains your underperformance.

There is not only a problem for the politicians, though: There is also a problem for the public.

The country being awash with money might seem, on the face of it, a good idea. And yet, at the same time, a splurge of Government cash could very well end up making us all poorer, because of the inflation it might cause. When you toss billions into the economy, and into the pockets of the public, you create higher demand. Higher demand leads directly to higher prices, or what we call inflation.

The public are not, in general, economists, and do not understand this. They – rightly and naturally – see only their own financial situations, and therefore favour things like more spending on housing, or tax cuts, to reduce their costs. And yet, as I have written on these pages before, the more Government spends on housing the more costs are likely to rise – because it is just more money chasing the same number of blocks, timber planks, plumbers, carpenters, and electricians. It would be very easy to spend billions and leave housing just as expensive, if not more expensive, than it is now. Especially with demand for housing continuing to grow as a result of inflation.

That is why, in the round, there’s an argument to be made that a surplus on this scale is active economic mismanagement, rather than sound economic administration. The Government is extracting more money from the economy than it needs, creating pressure for more public spending at a time when public spending is likely to contribute to an inflation problem.

There is the further complication that much of this boom in revenue is a result of corporation tax receipts, which are very vulnerable to a global recession. In 2008, we heard time and again that Ireland was a “small and open economy vulnerable to global headwinds”. In the intervening decade and a half, that remains as true as it ever was, and no efforts have been made to make our economic position more secure in the event of a global economic crisis. In fact, the public finances are very vulnerable.

Finally, there’s the issue of the state’s debt: Ireland owes its lenders 226 billion euros. With the economy motoring along, this is presently manageable, even though it stands at 86% of our annual GDP. But in an economic crisis where the state suddenly needed to borrow significant sums, that debt would become a major liability.

That is why, in the view of this column, the prudent thing to do with the €12bn we suddenly have to spare would be to use it to pay back debt. Politicians hate paying back debt, and the public hates the idea even more if it’s a choice between that and “more investment”. But at some point we have to realise that our problems in Ireland are not about spending too little money, but too much.

Pay back the debt. Or you know, failing that, maybe Fine Gael could finally abolish the USC.

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