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Spending watchdog warns that inflation crisis could hurt govt's budget for big ticket plans

The Irish Fiscal Advisory Council urged the government to properly factor in the cost of major health, climate and defence plans.

Minister for Finance Paschal Donohoe and Minister for Public Expenditure and Reform Michael McGrath.
Minister for Finance Paschal Donohoe and Minister for Public Expenditure and Reform Michael McGrath.
Image: Sam Boal

Updated May 31st 2022, 8:35 AM

A NEW REPORT has warned the government that it must carefully balance the cost of living crisis with following through on policies in the face of global challenges.

Analysing Ireland’s economy and public finances, the Irish Fiscal Advisory Council (IFAC) has urged the government to properly factor in the cost of major health, climate and defence plans to its budget forecasts.

The 2022 Fiscal Assessment Report outlines the shadow of inflation on the economy and sets out recommendations for the government. 

“The Irish economy has continued to grow despite global challenges, including the Covid-19 pandemic and the ongoing Russian invasion of Ukraine,” the report says.

“But higher inflation, driven by energy prices, has reduced expectations for real economic growth.”

The report says that uncertainty is “very high”, reducing consumer and business confidence, and that higher inflation “means significant spending pressures exist”.

However, data on “consumer spending, labour demand, and tax receipts have nonetheless remained robust in recent months”.

It notes that economic recovery from the pandemic has been uneven but faster than expected.

Chairperson Sebastian Barnes said that tax receipts have been “boasted by a swift recovery and strong taxes, in part thanks to the massive support provided during the pandemic”.

“But, the Government now faces difficult choices,” Barnes said.

“Supporting poorer households, keeping a lid on further price increases, and implementing other policies will be complicated in the short run. At the same time, more clarity is needed on how the Government will deliver on its longer-term goals while ensuring prudent management of the public finances.”

 The Irish Fiscal Advisory Council was set up in 2011 and is responsible for assessing the Department of Finance’s forecasts and government compliance with Budgetary Rule.

Its new report explains that the government forecasts a return to budget balance from next year with revenues boosted by high pay and high tax sectors but that higher inflation creates significant spending pressures.

To date, temporary measures taken to try to address the cost of living and to support Ukrainian refugees can be covered by contingency spending built into the budget, it says.

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But the amount of expenditure it would take to fully adjust welfare rates and public sector wages to higher inflation would mean there would be no funding for other permanent increases in spending without other offsetting measures, the IFAC concludes.

The report says the government will need to choose between how to address higher inflation and how to manage other priorities.

“A combination of carefully-calibrated temporary and targeted supports and permanent social welfare, wage and spending increases could help to achieve this,” it notes.

It recommends reducing reliance on volatile and vulnerable corporation tax revenues and make up the difference by rebuilding the Rainy Day Fund or paying down debt.

Major policy commitments must be properly costed and factored into the government’s plans, the report says.

The government must address “large uncertainties” about “the costs of major reforms such as Sláintecare and the costs of the Government’s commitments to significantly reduce greenhouse gas emissions by 2030″.

About the author:

Lauren Boland

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