Budget 2021: Better than expected

Image Credit: Laoise Tarrant

Garrett Kennedy takes a look at this year’s surprisingly positive budget

I have come to expect the worst from budget days in recent years. The most remarkable thing about Fine Gael is that no matter how low your expectations of them are, they nearly always find a way to surprise you. This budget, however, had a different kind of surprise. To paraphrase David O’Doherty, this budget was not so much the ‘finding a body in your bath’ type of surprise but rather the ‘your friend has grown a moustache’. While it did not leave me overjoyed, it was a pleasant shift towards a more optimistic and ambitious economic approach.

Budget 2021 was mostly much better than I expected it to be. The government offered generous supports for small businesses, the arts, extended the Christmas bonus to recipients of the PUP, massively increased the funding for transport, and followed the ESRI’s advice on the most progressive way to redistribute carbon tax revenue. All of this is much better than I predicted to come from this government.

The most promising aspect of the budget was not a specific spending commitment but rather the acceptance that deficits are a necessary and valuable component of fiscal policy. This is a dramatic shift from Fine Gael’s emphasis on budget surpluses. It makes me much more hopeful about government policy in the future. They have shown a willingness to do whatever it takes to keep the economy stimulated and I hope that this continues.

To be clear, the fact that they did not accept this sooner was reasonably bizarre. The ECB made it clear to the government at the outset of the pandemic that they were willing to back up whatever debt they needed to take on. Even before March, interest rates were low. (They have been in and around 0% since 2016) The government could have taken on more debt to fund the myriad public services which are currently underfunded.

While such a large increase in debt is alarming to many people, this is pretty much as close to a free lunch as exists in economics. The reason for this is that interest rates are so low that despite the amount of debt the country has just taken on, our debt interest payments in 2021 will actually be €0.3 billion lower than in 2020. As long as this money is invested sensibly it should increase government revenue by stimulating the economy. Because there is no interest to repay this means it is quite difficult to come out of this having lost money.

Some argue that this logic only holds if interest rates stay where they are currently. This is true but there is no reason to expect them to shift dramatically. That could only be caused by a very large increase in either growth or inflation. Neither of these possibilities seem particularly likely. The fact that the government has recognised this reality makes me much more optimistic about their future policy. Even if they only spend reluctantly, it seems they at least understand basic economics.

Despite all these positives, there were still several aspects of the budget which were underwhelming. Most of these seem to exist so that the government can claim to be helping without having to make the scale of sacrifice required to solve the problems. The most obvious examples of this are the €250 for students and the expansion of the Help to Buy scheme.

The €250 for students is a nice gesture but is not really large enough to help people who really need assistance in any serious way. €250 barely covers half of one month’s rent for most students. It only covers about one-twelfth of your fees. The government has said that the grant exists to help students adapt to working from home but this is one of the less significant of the many issues most students face. It seems that if the government had really wanted to help students who needed support, they should have simply taken the €50 million and added it to the SUSI grant. This could have increased the grant for current recipients or expanded it to even more people.

The Help to Buy scheme is quite a bit more egregious. This scheme has been going since 2016 and the government continue to prioritise it over other potentially useful housing policies. Because of the lack of supply, all offering cash to buyers does is increase house prices. This means that it may well actually be making the housing crisis worse. Even taking the most generous interpretation, that this policy has not contributed toward inflation, it is not clear that this has helped many people who would not have been able to buy homes anyway. It certainly does not help those on lower incomes. The only solution which will help these people is increasing the supply of housing. Any money spent on the Help to Buy scheme is money which could have been better spent building social housing.

The more cynical among us might suggest that the government’s seemingly religious allegiance to this scheme comes from them simply wanting to help landlords more than they want to help people on lower incomes get houses. Either way, it seems that this policy is doing little to help most people while costing an extremely large amount of money.

It is worth noting that the government did increase funding for housing in different ways. An additional €773 million was announced for housing, with €110 million of that specifically for affordable housing. Similarly, they have pledged to build 9,500 social houses in 2021. While this is certainly an ambitious target there is much reason to doubt it. In the 2020 budget, it was promised that 7,736 more social homes would be built this year. So far little more than 10% of that target has been met. The pandemic obviously slowed construction significantly but ultimately this shows that we should be sceptical of the government’s pledges on this issue until we see the figures at the end of the year.

Regardless, while the housing crisis remains one of the most serious conundrums facing the government, they have shown promise on fixing most other major issues. Their willingness to spend when needed gives me hope and it seems they are trying to account for the leftward swing which occurred among the electorate last February. Maybe budget days will hold less dread from here on out.