THE GOVERNMENT IS being warned that Budget 2023 should be a “delicate balancing act” between protecting people who are most vulnerable to rising living costs and fuelling further inflation.
The Irish Fiscal Advisory Council’s (Ifac) latest pre-budget statement outlines the potential pitfalls the Department of Finance faces as it creates spending plans for the year ahead.
It says the global economic recovery has been hindered by sharp increases in the cost of living amid Russia’s invasion of Ukraine and the lingering impacts of the Covid-19 pandemic.
The analysis said Ireland’s recovery remains strong, but has lost momentum in recent months. It added that a lasting upward shift in prices now seems more likely, raising the risk that Ireland will face higher cost-of-living pressures and slower growth over the coming years.
Ifac said difficult choices will need to be made in the Budget and the government cannot fully compensate everyone for the impact of higher energy prices.
The Summer Economic Statement revealed that the Budget package will be €6.7 billion, an increase in spending of €2.2 billion on the previous year.
This included plans to increase core spending by 6.5% by allowing a temporary deviation from the government’s new spending rule – which aims to keep core spending in line with the underlying growth of the economy and tax revenues.
The fiscal council said the government has currently struck an appropriate balance between protecting those most vulnerable to the rising cost of living and avoiding stoking inflation further.
It said the temporary deviation from the spending rule is sensible, given exceptionally high inflation, but noted that it is now important that the government sticks to its budget plans.
It noted that the cost of existing plans, along with full indexation of public sector wages, pensions and welfare payments to inflation would amount to just under €7 billion, significantly above the €4.9 billion spending increase outlined for 2023.
Looking ahead to the medium term, Ifac said the government lacks “credible” plans for major challenges that it needs to address – including halving its greenhouse-gas emissions by 2030, implementing Sláintecare reforms and tackling ageing costs.
Sebastian Barnes, chairperson of Ifac, said long standing gaps in policy need to be addressed.
“The Government faces a delicate balancing act and difficult choices in Budget 2023 to manage the soaring cost of living. Sticking close to its 5% spending rule strikes an appropriate balance, but there are major risks to the economy going into this winter,” Barnes said.
“The Government should act to reduce excessive reliance on corporation tax receipts from the multinational sector. Climate and health policies need to be costed and paid for.
“A long-term policy to make the pension system sustainable is required, but keeping the pension age at 66 will add to the costs. Using the Rainy Day Fund or creating a new National Pension Reserve Fund would help to save excess corporation tax receipts and prepare for the future,” Barnes concluded.
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