The Irish Fiscal Advisory Council (IFAC) will know that the next budget presents a moment of danger for the public finances. Before a general election, the Government will want to be generous , in order to try to win votes. Already there are promises of higher spending and lower taxes and pressure within the Cabinet will only increase over the summer.
Against this backdrop, the IFAC – the budget watchdog – has issued some timely warnings in its latest assessment. It does not believe that the Government is being prudent with the public finances. And it warns that now is not the time for what it calls an “everything now approach of tax cuts, increases in current spending and ramping up capital spending all at once.” This is likely to be precisely what the Government is planning, of course, though the council no doubt hopes that its intervention can lead to some moderation in what is announced.
The council’s conclusions are based on familiar arguments. The economy is already at full capacity, it says, and further stimulus risks overheating. Tax revenues – particularly for corporation tax but also income tax – remain vulnerable, given their narrow base. And due to what it dubs “fiscal gimmickry”, the council argues that the Government is already not accounting in a reasonable fashion for the bills that lie ahead. Part of this is because costs which are set to become permanent - such as those for housing refugees, or some of the cost of running the health service - are still being counted as temporary.
Assessing the current state of the Irish public finances is not clear-cut, due in particular to the unpredictability of corporate tax revenues. The Government would argue that the finances are in surplus and that cash is being put away into two funds ; the council’s case is that if " windfall” corporate tax receipts are excluded, then the budget is actually in deficit in underlying terms. The extent to which this matters relies on how corporation tax actually performs , of course, and whether the windfall continues.
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Nonetheless the council is clearly correct that another big “giveaway” budget would not be wise. The Government, as it says, must make choices on its priorities and not try to throw money out in every direction. Welfare and taxes must, of course, be adjusted for inflation and areas of particular need should be tacked. And there is a strong argument for pressing ahead with key investment projects.
But with inflation falling fast, there is no case to spend further billions in once-off universal supports to households. Tensions are already emerging in Government on this point. The council will, no doubt, hope that its advice will bolster the case of those urging caution and limit the damage. However, all the signs are that Budget 2025 is unlikely to find favour with the budget watchdog.