Fiscal watchdog says proposed public sector pay deal would help to ‘create space to support more vulnerable households’

The State’s independent budgetary watchdog will tell an Oireachtas Committee on Wednesday that the Government’s decision to breach spending rules in the Budget are “sensible” due to uncertainties over energy supply and that the proposed public sector pay deal would help “create space to support more vulnerable households”.

However, The Irish Fiscal Advisory Council (IFAC) will also warn of big risks to the economy going into the winter in the circumstances.

In an opening statement sent to the Oireachtas Committee on Budgetary Oversight in advance of its meeting on Wednesday, the Council’s chairman Sebastian Barnes has said that Ireland’s recovery following Covid, while still strong, has lost some momentum in recent months.

“There are big risks to the economy going into this winter, particularly of a shut-off in gas supplies to Europe. Covid-19 and Brexit still pose uncertainties. Financial conditions could tighten. And domestically, we could see competitiveness issues and capacity constraints arising from labour shortages, rising wages, and housing costs,” Mr Barnes has stated.

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The Council is of the view that the Government’s ‘temporary deviation’ from the 5 per cent spending rule is sensible in the circumstances. The Summer Economic Statement plans for a 6.5 per cent increase in core spending in 2023, almost €5 billion higher than initial plans.

It has pointed out that the higher spending is still less than inflationary figures.

“The Government faces difficult choices on Budget Day and needs to prioritise what it wants to achieve,” Mr Barnes has said in the statement.

“The proposed public sector pay deal, which increases pay by less than the full amount of expected inflation, would help to create space to support more vulnerable households.

“Improved targeting of cost-of-living supports would be less costly and would help get the balance right. Ireland’s welfare and income tax system offer useful avenues through which to better target supports.”

The Council says that oil and gas prices remaining high could prolong the current high rates of inflation.

It says that but for the surge in Corporation tax receipts, the State would not have had a surplus this year, but rather a deficit of €5 billion. It warns that corporation tax cannot be relied upon as a revenue stream into the future.

“Over-reliance on corporation tax revenues carries large risks. These receipts are highly concentrated with 10 firms accounting for 53 per cent of last year’s net receipts. These receipts are unpredictable; they depend on company-specific developments and there are risks associated with changes in the international tax regime.

“The Government should cap and, over time, reduce its over-reliance on ‘excess’ corporation tax receipts, including by saving them in the Rainy Day Fund or a new National Pension Reserve Fund,” he has stated.

The IFAC has also pointed out that Ireland has one of the highest debt ratios in the OECD. It has also advised the Government to set out how it will tackle the medium-term challenges of meeting the costs of an ageing population, reducing greenhouse gas emissions by 51 per cent by 2030, and completing the Sláintecare health reforms.

There is particular concern expressed about the increased pension burden in the future. Annual spending on pensions is set to rise by up to €5 billion by 2030 and the IFAC has said that choosing not to increase the pension age will be a “costly decision” with higher PRSI costs each year for employees and employers.