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THE MORNING LEAD

Careful now: Ireland's fiscal watchdog cautions Government against giveaway Budget

“This is not the time for loose budgetary policy,” said Professor Michael McMahon of the Irish Fiscal Advisory Council.

THE GOVERNMENT HAS been urged to show restraint and avoid a giveaway Budget this year in order to keep the economy and public finances on track in a new report published by Ireland’s fiscal watchdog.

The Irish Fiscal Advisory Council’s (IFAC) assessment of the government’s economic and fiscal projections for the year found that the economy is performing well and operating at full capacity, with unemployment rates at record low levels.

Falling energy prices is driving inflation down, but domestic inflation remains high, with IFAC stating that fiscal policy “should not add to demand”.

“This is not the time for loose budgetary policy,” IFAC’s Professor Michael McMahon said.

“Choices need to be made. Doing everything now – tax cuts, current spending increases, ramping up capital spending – could all overheat the economy and add to price pressures.”

Overruns in health spending are accelerating, with “significant” overruns already developing this year. IFAC – the independent body established to assess and evaluate the country’s fiscal policy – said this is “unsurprising” given overruns from last year were not incorporated into Budget 2024.

Currently, a health spending overrun of around €1.6 billion looks likely for this year, which would grow by 5% thereafter. “This is not a particularly healthy picture for the health forecasts,” IFAC said.

Looking at infrastructure, IFAC estimates that there are “difficult challenges” as capital spending is now lower than had been projected in the National Development Plan (NDP), and there have been delays in the delivery of NDP projects.

IFAC said that getting value for money when the labour market is tight and material costs remain elevated is “extremely difficult”, and fixing infrastructure deficits is a slow process that takes place “over many years”.

McMahon said it is “really important” that plans are in place to maximise value for money while also supporting the domestic economy at different points in the cycle.

“If the domestic economy is in a weaker position and there is lower demand for construction, this is an optimal time for the government to fill that gap and to try to implement as many of the NDP projects as possible,” he said.

“At moments where the domestic economy is extremely tight, projects that can have a lower resource use of domestic resources are to be prioritised.

“It’s a very difficult job. We acknowledge that.”

According to IFAC, the Government is set to breach the National Spending Rule both this year and next year.

The rule was agreed in 2021, and seeks to keep increases to “core spending” – spending from the Exchequer – at 5% or lower. However, the government has broken the rule in every budget since it was introduced

Since 2021, the breaches add up to €8.5 billion (9.7%) by the end of the year. 

IFAC and the Government differ when it comes to just how the big the overspend will be, with IFAC’s estimate being higher than the Government’s because the latter does not include likely spending overruns in its figure.

IFAC said the Government also uses “fiscal gimmickry”, which refers to accounting techniques that make its fiscal numbers either adhere to rules or “look more favourable than they actually are”.

“What this practice does is it means that you either have a better position in a technical but not an underlying sense, and what we really want to be transparently judging and assessing is the true underlying picture,” McMahon said. 

IFAC said the National Spending Rule is the “first line of defence” and the best guide for fiscal policy.

It welcomed new EU fiscal rules, which will see the Government submit a five-year fiscal plan, but said the new rules will not be a good guide for Ireland’s budgetary policy as they are set in GDP terms.

‘This fiscal gimmickry is undesirable’

The Government’s spending forecast does include €4.5 billion in spending mainly reflecting Covid-19 spending and humanitarian assistance, but it is presented as non-core spending.

Core spending reflects the more permanent measures that are included in the budget each year, while non-core spending describes more temporary, one-off measures.

In Budget 2024, this spending was assumed to drop to zero, which made the Government’s spending position look much healthier, IFAC said.

However, it argued that this spending is likely to be longer-lasting than a temporary measure and should be included in core spending. 

“We still see problems with the continued use of reclassifying things or including it as non-core. This fiscal gimmickry is undesirable, it weakens transparency.”

IFAC was critical of the Government for only forecasting for the coming three years, saying that making more long-term forecasts would be “a much more prudent policy”. 

It said the current, short-term forecasting means that “relatively imminent, major challenges” such as the cost of transition for climate change and the beginning growing cost of an ageing population are not captured.

The Government forecasts an underlying general government deficit of 0.9% of GNI* in 2024.

Modified gross national income (GNI) is a metric which attempts to give a better view of the Irish domestic economy by removing some multinational activity, such as windfall corporation tax receipts, as compared with the standard metric of gross domestic product (GDP) which is the value of goods and services produced in a country.

Revenue highly concentrated

The balance would remain in deficit out to 2026, which would mean 19 consecutive years of deficits.

IFAC highlighted how Government revenue is highly concentrated and could reverse suddenly. 

Ireland’s corporate tax payments are concentrated among a small number of large, foreign-owned multinationals, with IFAC estimating that just three firms accounted for 43% of corporate tax revenues in 2022.

It also pointed out that income tax is highly concentrated, with an estimated 20% of highly paid employees paying around 80% of the total income tax. 

It said a downturn in a small number of sectors would impact income tax, as well as corporation tax, which would be “a major fiscal challenge for Ireland”.

Current policy ‘not appropriate’

Concluding, IFAC said that the current budgetary policy is “not appropriate for the economy or the public finances”.

“Carefully planned and targeted increases in capital spending can be facilitated and support for particular parts of the economy or particular sets of household can also be accommodated,” it said.

“But this can be done without overheating the economy by either increasing taxes or containing other current spending and targeting the spending in the most effective way.”

It welcomed the setting up of the Future Ireland Fund, but said it believes the Government could be more ambitious in saving into the fund, which would lead to a larger fund to offset the 

This would mean a larger fund would be available to offset the “inevitable” costs of an ageing population and climate change down the line. 

IFAC called for the National Spending Rule to be strengthened by placing it in legislation. This would make it more likely to be adhered to.

It also called for the Government to forecast a minimum of five years ahead, and to provide transparent costings for climate action and Sláintecare.

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