The Irish Fiscal Advisory Council has accused the Government of failing to manage the public finances in a prudent manner.
In its latest report,the council warns that Budget 2021 includes “substantial and permanent increases” in spending unrelated to the Covid-19 pandemic amounting to €5.4 billion without long-term funding.
The additional expenditure relates to spending and hiring in health, education and other areas and is likely to remain long after the pandemic, it states.
“The increases are surprisingly large in the context of uncertain growth prospects and compared to previous budgets,” the council says.
It also notes that the increase in non-Covid spending next year could be as high as €8.5 billion if non-exchequer funding for local authorities and approved housing bodies is included.
“The council assesses that the permanent spending increases included in Budget 2021 – without a sustainable plan to finance them – are not conducive to prudent economic and budgetary management,” it says.
Fiscal pressures
“These permanent measures are substantial. There is no sense as to how this spending will be financed sustainably over the medium term,” it said, while warning it would add to future fiscal pressures.
It calls on the Government to use its next Stability Programme Update in April 2021 to deliver “credible” spending plans and present a five-year forecast that sets out detailed and transparent budgetary forecasts.
In its latest analysis of the Government’s budgetary strategy, the council welcomes the increased spending on pandemic-related supports, which will amount to €12 billion next year excluding a possible €2.1 billion contingency fund and a €3.4 billion Covid-19 recovery fund.
It says the additional spending is necessary to support the economy and “limit lasting damage from the crisis”.
Debt sustainability
The council says it expects the Government’s budget deficit – the difference between spending and tax revenue – to be just over €20 billion this year, which is significantly better than previously forecast, and €21.6 billion next year.
While this will increase Government debt, low interest rates create a favourable environment for debt sustainability.
In its report, it provides various Covid-19 recovery scenarios, the best involving the rollout of a vaccine next year and a free trade agreement between the EU and UK. In this scenario, the economy would recover to pre-pandemic levels of output by early 2022. The worse-case scenario involving repeated waves of the virus and a disorderly Brexit would not see the economy recover until at least 2023.
Council chairman Sebastian Barnes said: "Budget 2021 is right to continue massively supporting and stimulating the economy at a time when Covid-19 and Brexit will weigh on the Irish economy.
“However, introducing large permanent spending commitments without a plan to fund them sustainably creates fiscal risks.”
