Current Government spending plans risk overheating an economy already operating at full capacity, the State’s budgetary watchdog has warned in its latest fiscal assessment report.
The Irish Fiscal Advisory Council (Ifac) counselled Minister for Finance Michael McGrath again against breaking the Government’s own spending rule, which limits the annual increase in net spending to no more than 5 per cent. The Government has failed to abide by the self-imposed rule in each of its last two budgets.
Ifac also highlighted that the economy was in a particularly risky position given its reliance on a handful of companies for the bulk of its corporation and income tax.
“Current budgetary policy is not appropriate for the economy or the public finances,” Ifac acting chairman Prof Michael McMahon told reporters at an online press conference. “Given the strength of the economy, choices need to be made. This is not a time for the ‘everything now’ approach of cutting taxes, increasing current and capital spending and doing this all at once,” he added.
While the 5 per cent rule is based on so-called core spending, Prof McMahon said much of the excess spending tied to the pandemic and health overruns should now be classed as core, which would mean Government spending rising by 6.7 per cent this year.
Minister McGrath defended the Government’s management of the public finances.
“We have delivered a cumulative budget surplus of just under €17 billion over the last two years, with a further surplus of €8.5 billion forecast for this year, amongst the best performances of any EU country,” he said.
This has been achieved at the same time as delivering substantial cost of living measures and investment in public services and infrastructure,” he said
“All of this points to a steady and prudent approach to managing the public finances. The Government will provide a further update on the budgetary strategy in July with the publication of the Summer Economic Statement,” Mr McGrath said.
This is not the first time the council has been critical of the Government’s plans. Its latest criticism comes after analysing the Stability Programme Update (SPU) which the Department of Finance published in April.
Prof McMahon questioned the projections used in the SPU, which is seen as a key signpost of the Government’s spending plans in advance of the budget, expected in October. That is widely speculated to be a so-called “giveaway budget” in the run-up to the next general election, which must be held by March.
Mr McGrath has so far not confirmed if the Budget will breach the 5 per cent rule although he has promised a “substantial” income tax package.
Overruns in spending tied to the Department of Health were not “incorporated into the previous budget and are building quickly already in the first half of 2024″, Prof McMahon said. The three-year time horizon for future budgets meanwhile meant “relatively imminent” issues, such as climate change and an ageing population, are “not captured in these budget forecasts”, he warned.
The council also warned that Ireland’s economy, even if it is healthy overall, is now hugely vulnerable to a potential external shock given its growing reliance on a small number of companies for both corporation tax and income tax.
“We estimate that just three firms accounted for 43 per cent of corporate tax revenues in 2022,” Prof McMahon said. While the concentration of corporation tax has been well known for some time, Ifac highlighted that income tax is also reliant on a small group of well paid workers.
“Around 20 per cent of earners pay about 80 per cent of income tax . . . and given that some of those high earners are concentrated in those sectors which also pay the high corporate tax, a downturn in a small number of sectors would impact income tax as well as corporation tax. That would be a major fiscal challenge for Ireland,” he said.
Ifac noted that infrastructure spending is now lower as a proportion of modified gross national income – the preferred measure of Ireland’s economy – than had been projected in the National Development Plan. Still, that may be understandable given the high cost of construction and construction workers at present.
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