The role of the Irish Fiscal Advisory Council (IFAC) is one of critical oversight of the Government's control of budgetary policy and management of the economy.
As the council recognises in its latest fiscal assessment report, credibility on the public finances was hard-won by the former Fine Gael/Labour coalition – not to mention the electorate who suffered the impact of the austerity years. That credibility, it warns, could be easily and quickly lost by its successor, a minority Fine Gael-led administration.
The challenge facing the new Government, the council says, is to sustain and solidify “Ireland’s restored creditworthiness” and to avoid a repetition of past policy mistakes – involving a return to pro cyclical fiscal policy measures, leading to a repeat of a boom-bust cycle.
In particular, the council's concern is with aspects of the 150-page programme for government – agreed between Fine Gael and seven Independents – where the Government has yet to provide costings for many of the promises made.
And although it says plans to include tax and spending measures of about €900 million in next October’s Budget are reasonable, it cautions that providing in future spending projections for cost pressures associated with an ageing population, as well as the effects of inflation, could reduce its room for manoeuvre by half over the next five years – from €12 billion to €6 billion.
The council has called on the Government to set out clearly how the tax and spending measures proposed in its planned programme will be financed. This week saw revised estimates and some extra spending for two departments: with an additional €500 million provided to cover additional spending by the Health Service Executive (HSE) and €40 million allocated for Garda overtime. New EU rules apply this year which mean departments will no longer be able to rely on supplementary estimates to finance extra spending late in the financial year. Instead, in future, this must come through a reallocation of resources from savings or cuts made by the department in other activities.
Overall the IFAC broadly accepts the Government’s macroeconomic forecasts for the economy to 2021 were “within an endorsable range”. Nevertheless, the council remains concerned by high levels of household, government and corporate debt which leave Ireland vulnerable to interest rate rises and exposed to external shocks.
The strong economic recovery now underway, the council suggests, allows the Government scope to operate counter-cyclical fiscal policy to boost the economy during future downturns. This could be done by establishing a ‘rainy day’ fund, a commitment already made in the programme for government and one that would enhance its credibility as manager of the public finances.