Fiscal council concerned over level of risk in summer economic statement

The chairman of the Irish Fiscal Advisory Council has expressed concern with the Government’s summer economic statement saying it was taking on more risk with its plans.

The Department of Finance published its SES on Wednesday. The statement sets out the Government’s economic and budgetary priorities for the coming year and in particular the budgetary framework within which Budget 2022 can be delivered.

While the Government set out a plan in April to achieve a balanced budget by 2025, the SES sets the country on a different fiscal path, envisaging a series of much bigger budget deficits, culminating in a deficit of €7.4 billion in 2025. By contrast, the Stability Programme in April put forward by the Minister for Finance Paschal Donohoe had pencilled in a deficit of €800 million for 2025: essentially a balanced budget. The SES has added €6.5 billion on to this target. The Government also plans to borrow an additional €18.8 billion.

Sebastian Barnes told RTÉ's Morning Ireland that in terms of the fiscal framework, many aspects of the plan were in line with the advice given by the Fiscal Council, however, he said there has been a major shift of policy with the plan.

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“In the Programme for Government they (the Government) said in the medium term, by 2025, they would be aiming for a balanced budget. What they’ve now said is that they want to stabilise the debt or maybe reduce it a little bit – that means a three percent deficit which is very large by historical standards in Ireland.

“It implies €20billion additional borrowing compared to what the Government was originally planning, so it is a big change and it raises concerns, because the more debt we have, the more exposed we are to a rise in interest rates or a shortfall in growth or other nasty surprises that might come down the line.

“The Government is definitely taking more risk with these plans and that’s why we’re concerned.”

Mr Barnes said that a lot of the increase had been in terms of current spending, not capital spending. “We know that the Government is investing a huge amount by historical standards and wants to invest a lot, particularly in areas like housing and on climate where we know additional money is badly needed.

“They’re facing a very difficult balancing act between the opportunities and need for investment, current spending needs that they’re going to have between fiscal sustainability and avoiding overheating the economy, so that’s a very delicate balance and it’s something that the council is going to have to assess very carefully in the months and weeks ahead.”

Investment information

Mr Barnes said the council needs more information on exactly what the investment spending is going to be.

“We tend to think that investment spending is a good thing, which in many cases it probably is, but it does matter a lot what that investment money is going to be spent on.”

Mr Barnes said that it was very simple – “the more debt you have, that means a one percent change in interest rates - the impact that has goes up with the size of the debt, so the more debt we have the greater that risk is.

“There’s not a huge differences between debt on the two parts, but there is a significant difference. If you take the forecast the Government made in April when it was looking more at balance, debt would have been falling at about three percentage points or national income a year to 2025, it means we really would have been on a path to a much lower debt level than the one we have now.

“Now it’s going to be on a path where it’s not falling by very much, debt will likely remain over 100 percent of national income for many years to come.”

On the issue of the rate of corporation tax, Mr Barnes said that he thought the country’s reputation was very important. “The council doesn’t have a view on the tactics around corporation tax, but it does remain a concern and we know there are these big international changes, they are likely to have an impact on Ireland.”