Budget reversal of policy on tackling climate change was a mistake

T here are three crucial tasks for any budget : does it implement a long-term economic strategy; is the trajectory of the public finances sustainable; and will it manage aggregate demand in the economy so that economic activity remains close to capacity? This year the strategic priorities for the Government should be to enhance the economic security of the State and promote long-term growth, tackle climate change , and reduce poverty, especially child poverty. The budget has further increased our dependence on corporation tax as indirect taxes are reduced, increasing the economy’s vulnerability. However, unlike many other economies, we will still run a small surplus next year; it is just that it should be much larger. This budget scores well on growth, committing increased resources for infrastructural investment. Government investment, which is €20 billion this year, will increase by almost 15 per cent in 2027. This is more than 5 per cent of national income, much higher than in other countries, reflecting our rapid population growth. Some of this investment will go on the start-up of MetroLink and other projects, but the fruits of this investment will only be fully apparent many elections hence. Jam today would have been easier for the Government, but this is the right answer. Where the budget is faulty is the reversal of the policy on tackling climate change . The carbon tax was due to rise gradually to 2030 to encourage us to reduce emissions and to fund investment in key climate projects, such as retrofitting and protecting those on low incomes. This budget has reversed this, cutting the tax rate on certain fuels, with a commitment to leave it at this low level to 2030. This sends all the wrong signals, and it also means there will be significantly fewer resources to protect those who are energy poor and to fund important climate investment, including flood protection . The number of children in poverty is increasing, despite our run of economic success. Research by the ESRI has shown that the best way to tackle this problem would be to introduce targeted income supports for children living in low-income families. An opportunity to do this was missed last week. Dealing with the effects of higher inflation on living standards is best done in a number of ways. The income tax system should be indexed so that the tax take does not increase by stealth. In contrast to last year, this budget does this. The exceptionally high energy prices pose particular problems for those on low incomes, with higher expenditure on heating. This clearly needed to be addressed, and the best way of doing it would have been to increase welfare payments and introduce targeted support for the energy needs of the most vulnerable. [ The Government won’t raise carbon tax again but promises to decarbonise the economy – how? Opens in new window ] Instead, Government expenditure on social payments will rise by only 2.7 per cent next year, less than inflation, and there is no significant targeted support for those who need it most. More of the reduction in excise tax on fuel goes to those on high incomes, reducing the incentive to cut our emissions of greenhouse gases. None of it goes to those who cannot afford a car. An unsatisfactory outcome for the climate, and for those on low incomes who will suffer from the cold this winter. If the Government sticks to the numbers in the budget it looks likely that it will be neutral, neither stimulating nor deflating the economy. While some tightening would have been better, the stimulus largely arises from the very desirable increase in public investment. The budgetary numbers published last week also show the share of public expenditure in national income next year will remain roughly unchanged compared to this year. If this proves to be the outcome, it would be satisfactory. However, as with recent budgets, this one carries the seeds of another overrun. It is no surprise that Minister for Public Expenditure Jack Chambers did not put a precise number on the provision for public service pay next year. He is beginning a negotiating process, and anything he provided would be taken just as the starting point by trade unions. Thus, there is likely to be some overrun to provide for the final outturn of the pay talks. The provision for social payments looks like an underestimate of what will be spent. Also, once again in some departmental budgets, it looks as if the estimates do not provide for expenditure that will prove unavoidable, for example in health. While on paper the budget numbers look moderately prudent, as in previous years, they may prove a poor guide to the eventual outturn.