Will Govt spending be reined in as elections on horizon?

It must feel decidedly uncomfortable being pulled in two directions at once.

But that’s the situation facing ministers Paschal Donohoe and Michael McGrath – defenders of fiscal prudence at the Cabinet table, while also keeping an eye on voter sentiment ahead of the general election.

Three years ago the coalition of Fine Gael, Fianna Fáil and the Green Party introduced a limit on annual spending which capped expenditure growth at 5%.

Last year Minister for Finance Michael McGrath said it was “not a rigid rule” and abandoned it, blaming the surge in inflation. Spending ratcheted up by 5.7%.

Spending is 15% ahead of last year for the first three months of 2024, and Paschal Donohoe and Michael McGrath have told other ministers to tighten expenditure controls.

This week the Government published a forecast for the economy which sets the parameters for the budget in October.

It will be the coalition’s last tax package before the country goes to the polls later this year or early next year.

The Department of Finance’s forecast showed that inflation, running at almost 10% in autumn 2022, had dropped to 5% in 2023 and will be 2% this year.

With cost of living rises easing off considerably, Michael McGrath was asked whether the 5% spending restriction would be reintroduced.

He hinted he would like to see expenditure brought back into line and said as inflation fell, Ireland was moving towards a more “normal” budgetary environment.

“The changed inflation environment will have an impact on our approach to the Budget and we did have a vast array of inflation related payments, exceptional supports, one-offs last year,” he told RTÉ’s Morning Ireland.

But he added the decision had yet to be made by ministers.

He has left wriggle room for the coalition to break the spending rule once again.

At the Cabinet meeting this week Minister for Public Expenditure and Reform Paschal Donohoe warned colleagues to rein in spending.

Later that day at a press conference in the Department of Finance Michael McGrath said: “There is a need for continued budget discipline and both Minister Donohoe and I emphasised the importance at Cabinet of respecting the budget parameters.”

Ironically, Michael McGrath also defended his decision to talk up largesse planned for the next budget.

He told delegates at the Fianna Fáil Ard Fheis: “We will again have a substantial income tax package.”

In fairness, the Fine Gael Ard Fheis was also full of give-away promises.

When asked about the possibility of the 5% spending rule being breached, Paschal Donohoe was quick to emphasise that a substantial €6bn is being set aside in two new funds to pay for future spending.

These two savings’ pots, called the Future Ireland Fund and the Infrastructure Climate and Nature Fund, could easily become the focus of attention when budget negotiations grow fraught.

Some ministers might wonder why they are turned down for spending requests while billions are being set aside for future projects.

The idea is that when times are good, money can be saved for future projects such as nature, water quality and biodiversity – always essential investments, even when cash is tight.

This is being presented as a prudent use of money perhaps to make any breach of the spending rule look slightly better.

But there is political peril lurking on the decisions facing the Government on fuel.

The Cabinet had reduced the excise on petrol and diesel during the cost of living crisis.

Since then oil prices dropped and the price at pumps fell.

Now the Government is increasing the excise on petrol and diesel in two increments this month and again next August.

The two increases will add eight cent to petrol and six cent to diesel.

On top of that, we know the Government has legislated for an increase in Carbon Tax in the budget. That will add about another three cent a litre.

But if the price of a litre of fuel approaches €2 ministers know this would hand the Opposition an opportunity to go on the attack.

The coalition is locked into the Carbon Tax rise because it has already passed legislation to introduce the increase.

If it senses political danger it may review the second part of the excise increase which is pencilled in for August.

In the coming weeks the electorate will go to the polls for the local and European elections.

If the coalition parties do badly the pressure on Michael McGrath and Paschal Donohoe to agree to additional spending as a general election nears will intensify.

Watch this space.