THE IRISH FISCAL Advisory Council has called on the Government to clarify how major commitments on health and climate change will be funded sustainably as “room for manoeuvre is tight”.
In its latest fiscal assessment report assessing the Government’s forecasts in Budget 2022, the IFAC notes that the economy is continuing to recover with domestic demand returning to pre-pandemic levels.
However, the report notes that it is currently unclear how major commitments on health and climate change fit into the Government’s medium-term strategy given costs of Slaintécare have not been updated since 2017 and there is no estimate of the budgetary cost of implementing the Climate Action Plan.
The council warned that lack of a plan to meet these commitments create risks to
the implementation of the Government’s fiscal plans in the years ahead: “Failure to fully plan for future spending pressures may make it more difficult for the Government to stick to its spending rule.”
“Despite the publication of the new Climate Action Plan in November, it remains unclear what the cost to the Government will be in halving Ireland’s greenhouse emissions by 2030. While a substantial part of the National Development Plan’s capital spending could contribute to these objectives, there may be significant additional costs to the State, particularly in encouraging the switch to electric vehicles and improving home energy efficiency,” the report notes.
On health commitments, there is currently no clearly identified budget to continue implementing Sláintecare reforms in health beyond next year and there are no up-to-date estimates of the costs of implementing remaining reforms. In the areas of climate, housing and health, more detail is required on future plans and their expected impact and cost.
The IFAC also stressed that the current over-reliance on corporation tax needs to be addressed, as one-in-five euros of tax receipts were from corporation tax in2020, and more than a half of those receipts were from ten corporate groups.
“This concentration, coupled with the ongoing volatility of receipts and their vulnerability to international tax developments is a source of serious concern.”
The budgetary watchdog found that Budget 2022 strikes an “appropriate balance” between supporting the economy and keeping the public finances on a sustainable path with the government taking “welcome steps” to develop a more credible budget strategy for the coming years – its new 5% Spending Rule, spending forecasts based on maintaining Existing Level of Services, and the updated capital plan.
The council said that the Government needs to now follow through on this strategy and recommends it be strengthened by setting spending ceilings for each Department as legally required, and linking the 5% Spending Rule more closely to the domestic fiscal rules and expanding it to cover non-Exchequer spending and tax changes, and given legal backing.
The IFAC stressed that room for manoeuvre is tight as the plans only allow for an average of €0.5 to €1.5 billion of additional current spending each year over the medium term without raising taxes or cutting spending in other areas.
“The Government has set out a more credible strategy. By sticking to its plans, this would deliver both higher investment and allow the debt ratio to fall to safer levels,” said Chairperson of the Fiscal Council, Sebastian Barnes.
“However, the Government now needs to clarify the costs of Sláintecare and the new Climate Action Plan and how these will be funded sustainably. The over-reliance on corporation tax needs to be addressed.”
The report also notes that risks to the economy over the medium term are “broadly
balanced” but growth prospects could be impacted by further restrictions to manage
the pandemic, risks to foreign direct investment from international tax developments, and continued uncertainties around Brexit.
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