Announcing an expansionary budget when economy is at full employment and inflation is high appears to be politically motivated
Budget 2024: Economic logic insists that if you increase demand in an economy at full capacity you will stoke inflation. Photograph: Tom Honan
Economic logic insists that if you add to demand in an economy already running at full capacity, you will stoke further price inflation. This, in theory, will require more public spending down the line , leaving the Government – in effect – chasing its tail. We doubled down on this pro-cyclical stance after the bust by embarking on a swingeing austerity programme just when the economy needed a lift.Budget 2024 is a prime example of this tension between economics and politics. Minister for Finance Michael McGrath on Tuesday flitted between defending his budget against attacks that it wasn’t enough to help struggling households to defending it on the grounds that it wasn’t too inflationary.
The decision to dump the spending rule comes as Sinn Féin’s poll lead over both Fine Gael and Fianna Fáil grows and as the public clamour for measures to deal with the cost-of-living gets louder. Successive Irish governments have repeatedly been forced into periods of austerity and cost-cutting because they’ve failed to keep a lid on spending.
McGrath’s plans for two long-term investment funds – one to tackle the State’s looming pensions problem, the other to buttress capital spending in the event of a downturn – provides the State with the ammunition to break this cycle.
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