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Government's 'risky' budget strategy could put debt on 'unsustainable path', watchdog warns

The Fiscal Advisory Council said there are “clear needs” to tackle housing, health and climate shortfalls.

Image: Shutterstock/Milje Ivan

THE GOVERNMENT’S SPENDING plans for the upcoming budget are “at the limit of what is prudent”, the Irish Fiscal Advisory Council (Ifac) has warned.

In its pre-budget statement, the budgetary watchdog noted that Ireland’s economy is recovering quickly from the coronavirus pandemic but the government’s “major shift in policy” towards higher spending and tax cuts could leave the debt ratio on “an unsustainable path”.

It noted that running “significant budget deficits” during a period of strong growth and with high public debt carries risks.

Ifac assessed that the government needs to prioritise between tax cuts planned, the pace of investment expansion and the speed of increase in current spending, suggesting it cannot do all three simultaneously.

“By expanding all areas at once, the Government is effectively evading difficult choices and slowing the return of debt ratios to safer levels.

“This reduces the scope to ensure that future downturns or crises could be cushioned by strong fiscal support in the same way as during the pandemic,” the council said.

Running significant budget deficits for several years during a period of strong growth and with high public debt is a risky strategy. It will lock in large deficits and lead to a slow pace of reduction of the high level of debt.

Ifac said that a more prudent approach would be to limit current spending to a slower pace of increase or to avoid plans to reduce the tax base at the same time as a ramp-up in public investment spending is planned.

The council noted that there is “a good case” for increased investment in areas such as housing, the health service and climate change as “there are clear needs to tackle various shortfalls”.

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It also warned that public investment management has historically been weak in Ireland. Because of this it noted that there is a need to ensure that future investments generate value for money.

Ifac said the economy was recovering swiftly due to Ireland’s Covid-19 vaccine rollout and an “unwinding” of the huge savings accumulated during lockdown would result in a “faster bounce back in the economy”.

“This could help to limit long-term losses following the pandemic,” the council said.

About the author:

Céimin Burke

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