Government budget policy has “lost its anchor” with spending on a potentially unsustainable trajectory, the State’s budgetary watchdog has warned.
In its latest assessment report the Irish Fiscal Advisory Council (Ifac) noted that while inflation has eased net spending was now growing at a rapid rate – by a projected 8 per cent in 2024 and 2025. Net of inflation this is double the economy’s projected growth rate over the medium term and, from the council’s perspective unsustainable.
“The biggest risk is that budgets continue in this vein and exceptional corporation taxes dry up,” it said. “This would set public debt on a much riskier course. It would be painful to reverse, especially as pressures from an ageing population mount,” the council said.
Ifac’s warning comes in the wake of another near record budget spend and an election campaign where parties from all sides made big spending promises on the back of windfall taxes.
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In its analysis Ifac said the next government would likely find itself in a strong position financially with record employment rates and soaring tax receipts “not expected to unwind soon”.
“This is good. But a lot will depend on two things. First, what happens corporation tax. Second, how the next government sets its budgets,” it said.
The council warned that the public finances were being kept in surplus by extraordinary corporation tax receipts. While these receipts could well grow further they remain high risk, with a small number of firms accounting for the bulk of the receipts. “A hit to even a single firm could lead to substantial falls,” it said.
The council said the incoming government should treat its exceptional corporation tax receipts more like Norway treats its oil. “This means recognising it as a high-risk, finite resource and saving more.”
It warned that the next government must avoid the temptation of diverting more corporation tax to spending increases and tax cuts. “In an already strong economy this could mean further overspends, bad value for money, and delays.”
The council said the next government should adopt a sustainable spending rule that “it will stick to”, and set out realistic plans for dealing with the State’s health, housing and climate challenges.
Ifac chairman Seamus Coffey said: “The next government should put in place some guardrails in the form of a rule. This would ensure it doesn’t ramp up ongoing commitments as each budget day approaches. A rule and some realistic plans would help to tackle infrastructure deficits, ageing pressures and climate needs, while also protecting growth and limiting future job losses.”
The previous administration adopted a spending rule in 2021, promising to keep the annual increase in expenditure within a 5 per cent limit, but has repeatedly broken the rule since.
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