State breached post-crisis spending rules last year

The Government breached post-financial crisis spending rules last year, with budget increases leaving the State running the risk “of repeating the mistakes of the past”, the fiscal watchdog has found.

The finding is contained in a 176-page draft of the Irish Fiscal Advisory Council’s Fiscal Assessment Report, which has been seen by The Irish Times.

Using a new “principles based” approach, the council found that the expenditure benchmark – a limit for annual spending growth – was breached last year, coming in at 6 per cent for the year, above the target of 5 per cent set by the council under its new methodology.

The report warns that the breaches “reinforce the view that the increases in recent years have not been conducive to prudent economic and budgetary management”.

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It criticises in-year increases to budgets, for example health.

“Repeated, procyclical revisions to expenditure ceilings look set to continue,” it says. “This risks repeating the mistakes of the past, with revisions to expenditure ceilings now of a similar magnitude to those immediately prior to the crisis.”

While current projections are that the key spending limit will not be breached this year, more budget overruns could lead to a second transgression.

Drafts of the full council report, which will be published on Tuesday, were distributed to members of the Oireachtas budgetary oversight committee last week.

The report identifies health overruns as the most serious fiscal risk facing the State, rating it as a having a high likelihood of occurring and a high impact if it does.

The report is also critical of Government spending and economic projections. It argues that the Department of Finance "could well understate the degree of overheating" possible in the economy.

Impact of spending overruns

It says that expenditure forecasts for the medium term are “not credible” as they are based on “technical assumptions which do not reflect either likely future policies or the future cost of meeting existing commitments”.

The report warns that if spending overruns similar to those seen on the National Children’s Hospital and the National Broadband Plan are replicated across other large projects, the budget for other projects to be supported by the National Development Plan would fall from €11.6 billion to €9.7 billion annually.

The Government has committed to supporting a range of vital infrastructure projects across a variety of areas through the plan, including housing, roads, public transport, ports and airports, climate action, education and water infrastructure.

An inability to constrain budgets also creates a cycle where the market believes overspending will be tolerated, warns the watchdog.

“This creates future problems by reinforcing the belief that upward revisions to the ceiling are very likely to be facilitated, hence weakening spending controls further. The interaction between unrealistic forecasts and a subsequent relaxation of ceilings can put the public finances at risk.”