The country’s spending watchdog, the Irish Fiscal Advisory Council, has warned that the government is planning to “repeatedly breach the National Spending Rule every year out to 2026”, which they say is a “serious cause for concern” and risks “repeating Ireland’s past mistakes”.
The Council said it was their opinion that the Irish economy was in an “unusually strong position” and “does not require additional stimulus through a large budgetary package” – and warned that “strong revenues should not be taken to mean a war chest of resources”.
The independent statutory body – which is tasked with scrutinising public finances and assessing the Government’s fiscal plans, said that “Ireland must break with its procyclical past” – a reference to a tendency to follow ‘boom and bust patterns’ in business or economic trends.
Acting Chairman, Prof Michael McMahon, noted that tax returns over the past year were reflective of a strong economy with “above full employment” – although he also said there were “some signs of an abatement in the rate of growth”, with PRSI receipts “weak in August at 1.4% below profile”, even though income tax cumulatively “is up 8.2% year on year.”
He warned that further stimulus to the Irish economy could add to the price and capacity pressures already being experienced – and that Ireland’s “strong fiscal position” was being “flattered by corporation tax receipts” – which could be volatile and unreliable and as shown by the August Exchequer returns, were some €1 billion lower than the same month in 2022.
He said the Council had repeatedly argued that some of the Corporation tax returns should be “treated as windfalls”.
“Relying on volatile and concentrated revenue for permanent spending is a costly mistake that echoes the reliance on housing related taxes before the financial crisis – this is not a mistake we should wish to repeat,” the Council’s Acting Chairman warned.
Urging the government to be more forward looking, the Council also said that the cost of an ageing population would grow especially from 2030.
Prof McMahon warned that “spending overruns continue to grow” and that “current spending Is now overrunning by 1.1 billion Euro” with overruns in health and children increasing.
“Health overruns now amount to around half a billion [euros] , and while some of the Social protection and Children spending is likely driven by spending on Ukrainian refugees – and the earlier cost of living packages for which there was some about 0.4 billion unallocated but earmarked for this spending that money now appears to be exhausted given these overruns,” he said.
“The overruns now more than offset the current strength in Revenue overall,” he warned, saying this was “especially true if we exclude corporate tax revenue – and as the most recent data has shown there is huge uncertainty about [Corporation Tax] CT over the coming months let alone over the coming years.”
He said that the government had scope within the parameters of the spending rule, remaining within the overall increase in spending of 5 per cent annually, by transferring and redistributing from some sectors of the economy to fund increased spending in others.
“There is a need for tough choices,” Prof McMahon said, advising that “the Government should plan comprehensive reviews of existing programmes”.
The Council said that the government “now plans to repeatedly breach the National Spending Rule every year out to 2026”.
“The Rule sets a 5% limit for core spending increases net of new tax measures — a spend broadly matching trend growth that would help stabilise the economy and avoid fuelling price and wage pressures.”
“Core net spending is now expected to be €4 billion higher by 2026 compared to previous plans”, the Council warned.
They said the breaches are a serious cause for concern.
1) They risk repeating Ireland’s past mistakes, with employment already high and windfalls boosting the Exchequer. This would represent a continuation of procyclical fiscal policy.
2) The stance adopted undermines the National Spending Rule at a time when EU fiscal rules are not binding and likely to be distorted by GDP if and when new proposals are enacted.
3) The manner in which plans were revised weakens the credibility of Government projections, lacking transparency and not factoring in overruns and costs related to population ageing and the climate transition.
“The Council recognises pressures for additional spending, but these pressures should be funded sustainably. Pressures in health, housing, infrastructure and climate-related areas are likely to need ongoing multi-year funding.”
“If the Government wishes to ramp up spending across all these areas, it should ensure that the outlays can be maintained on an ongoing basis and not just based on receipts expected to prove temporary,” the Council said.
In regard to Budget 2024, the Council said that its advice was:
• The Government should adjust its plans to stick to its National Spending Rule. This would ensure more credible and sustainable fiscal plans. It could be achieved by introducing offsetting tax increases or spending adjustments elsewhere. To this end, there is a role for developing more comprehensive reviews of existing programmes.
• There is little to no justification for further temporary non-core measures in Budget 2024. Energy prices are falling and temporary measures risk adding to price pressures. Additional unfunded measures, given the existing pressures and low unemployment, would represent a further shift toward a more procyclical fiscal policy.
• The Government needs to improve its long-term planning. The Government’s fiscal plans only go to 2026, right before new estimates from the Council suggest climate costs will mount (Casey and Carroll, 2023). Ageing pressures will also begin to deepen towards the end of this decade.
• The Council welcomes proposals for a new Savings Vehicle — temptations to spend more resources immediately should be resisted, without offsetting measures elsewhere. There are substantial pressures for additional spending and there is a good case to be made for additional public investment. However, the State already has ways to achieve that. The National Spending Rule allows additional spending provided this is offset elsewhere, while the National Development Plan provides a framework to plan longer term capital needs. The rationale for an investment fund is weak. It risks simply being used as a means of ramping up capital spending in the short term even more than currently planned, and at a time when getting value for money is challenging.
• The Government should reinforce its National Spending Rule as a “first line of defence”. The Government’s National Spending Rule could continue to prove a useful tool to ensure the public finances are managed sustainably. But it needs to be reinforced and adhered to.
In a video accompanying its Pre Budget Statement, Prof McMahon said that the focus of the Council was on the broader fiscal perspective, and that tough choices needed to be made because inflationary pressures caused the economy to run hotter which meant it did not need fiscal stimulus.