Irish Fiscal Advisory Council says rationale for State investment fund ‘weak’

‘Spending now risks low value for money,’ says chairman of government spending watchdog

The plan to create a new investment fund risks further fuelling a ramp-up in capital expenditure at a time when it is difficult to get value for money, Ireland's budgetary watchdog says. Photograph: Frank Miller
The plan to create a new investment fund risks further fuelling a ramp-up in capital expenditure at a time when it is difficult to get value for money, Ireland's budgetary watchdog says. Photograph: Frank Miller

The State’s budgetary watchdog has criticised the Government’s proposal to create a new investment fund, and said it risks further fuelling a ramp-up in capital expenditure at a time when it is difficult to get value for money.

In its pre-budget submission the Irish Fiscal Advisory Council (IFAC), an independent statutory body set up to scrutinise the Government’s fiscal plans and forecasts, welcomed the Coalition’s plans to set up a new savings vehicle, the National Reserve Fund, funded by windfall corporation tax receipts. Still, it warned the reasoning for setting up a sovereign wealth fund of this kind was questionable given the current high inflation levels across the globe.

Mooted in July, the investment fund would be separate to the savings vehicle, and would seek to ensure that capital spending on infrastructure projects was not cut in the event of a downturn, the council said.

But it warned on Wednesday that “redirecting the windfall receipts to capital spending in the coming years carries risks and the rationale for an infrastructure fund is weak”. It said that increasing capital spending now would add to already high capital commitments and risks fuelling further price and wage increases, “most notably in construction where workers are particularly scarce”.

READ SOME MORE

Instead, the Coalition should “build on [its] existing tools” such as the National Development Plan in order to better plan capital spending.

Speaking to reporters on Tuesday, acting IFAC chairman Prof Michael McMahon said: “Spending now risks low value for money, especially given that investment spending is typically concentrated in already constrained sectors.” He said price pressures and labour shortages continued to dog the construction sector, where “costs remain high relative to even just two or three years ago”.

Mr McMahon said it was not easy to catch up on years of underinvestment in certain areas quickly. “It should be done carefully and in a well planned manner, and this is what the National Development Plan aims to do.”

IFAC also strongly criticised the Government’s plan to breach its own spending rules each year until 2026. The watchdog said that relying on bumper tax revenues, much of which are windfall in nature, risked repeating Ireland’s past mistakes in the lead-up to the 2008 financial crisis.

Corporation tax receipts fell sharply in August, according to figures released earlier this week, down €1 billion on the same month last year, raising fears about the volatility of this key source of revenue to the exchequer.

IFAC has previously sounded alarm bells about relying on the business tax receipts to fund permanent core spending. Speaking on Tuesday, Mr McMahon said the August exchequer returns highlights that the “ongoing reliance on corporate tax is risky given its volatility and potential unreliability”.

“We’ve argued, and the Government seems to have largely accepted the argument, that some of these returns should be treated as windfalls,” he said. “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.”

The Department of Finance did not immediately comment.

Ian Curran

Ian Curran

Ian Curran is a Business reporter with The Irish Times