Will inflation change the facts after Budget 2022?
In the run up to the Budget, the Government's plans had been characterised as potentially "risky" and at the limit of what could be considered "prudent" by the Irish Fiscal Advisory Council.
But on Budget night, according to IFAC, the Government had put the economy on "a more prudent path".
What fiscal miracle had occurred?
How had a headlong rush into deep deficits and mounting debt come up smelling of prudent roses?
The Fiscal Council may well have looked for help, appropriately enough in the circumstances, from the famous economist John Maynard Keynes who when challenged over something (was it the gold standard?) is reputed to have said "...when the facts change, I change my mind. What do you do, Sir?" (There’s a minor reference library on the internet which discusses at some length whether or not Keynes actually did make such a remark).
Two significant changes to the metrics of the economy became clearer just weeks before the Budget: both domestic activity and the multinational sector have rebounded much stronger than had been predicted. And tax revenues, which follows from both, is considerably higher.
Despite these good omens, the Government stuck to its plan.
The consequence of that choice was to accelerate the repair of the public finances’ €48 billion Covid hole. And to patch over the significant increase in current spending which was shoved into last year’s Budget and remains as a recurring cost.
We have now moved from higher deficits which had been projected to still be €7.4bn in 2025 to returning a surplus of €875 million in that year and the practical elimination of the deficit in 2023.
This doesn’t mean the Government has suddenly stopped spending money. On the contrary. general Government expenditure next year, which includes what’s voted through the Dáil and other items like interest on the national debt, will reach €105bn.
That’s around €1.4bn less than last year, reflecting a reduction in Covid-related expenditure.
That’s still a lot of money, as anyone who sat through the 98 separate spending initiatives announced in Minister Michael McGrath’s speech on Tuesday can attest...right down to the €5m in capital grants for community centre upgrades.
Since the Budget several economists, including Goodbody’s Dermot O’Leary, have pointed out that there has been a big shift in thinking since the pandemic.
In a research note, he wrote that the "...major legacy of the pandemic is the bigger role for the State..." noting that since 2019 core government spending has increased by 24%.
The ESRI repeated its view at the end of the week that while increased capital spending on neglected infrastructure needs in areas like housing is to be welcomed, there will need to be "discipline" on the current spending side to ensure the economy doesn’t overheat.
As long as growth forecasts remain rosy and tax revenue keeps rolling in, this is a debate we can afford to have and should have and political parties will line up on one side and the other.
But like Banquo’s ghost, inflation and rampant property prices appeared with a vengeance this week while everyone was still digesting the Budget banquet.
The big question they pose is whether inflation in all its forms will change the facts again.