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The latest report from the Irish Fiscal Advisory Council (IFAC) is a signal of difficult decisions to come. The council backs the economic supports put in place during the pandemic and feels the bounceback in growth may be stronger than the Department of Finance has predicted. However, it is critical of the Government’s budgetary plans, saying in particular that its medium-term forecasts for the public finances are not credible because they fail to factor in reasonable estimates for spending.
The council has long been critical of the longer-term budget forecasts, arguing that they do not fully account for factors like the ageing population. However, the criticism is intensified in the latest report, which argues that the latest official forecasts are poorly founded, do not allow for major policy commitments like Sláintecare and do not, as had been promised, set out a medium-term strategy for the public finances.
While the continuation of pandemic supports into this year was 'appropriate', the council says €5.4 billion in permanent additional spending in the budget for 2021 was not
The Government has argued, with some justification, that longer-term financial planning has been impossible given the prevailing level of uncertainty. The Government did the right thing in putting in place extensive pandemic supports, but IFAC is correct that the time has now come to start to outline what happens next.
The recent forecasts in the Stability Programme Update submitted to Brussels are on the basis of “no policy change” and so do not account for future Government plans. But the council argues that they are unrealistic, adding up to a “piecemeal” approach which is not providing full guidance. While the continuation of pandemic supports into this year was “appropriate”, the council says that €5.4 billion in permanent additional spending in the budget for 2021 was not. The council also renews its warning on Ireland’s reliance on corporation tax, saying more than half of this tax now comes from 10 big companies.
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Adding these factors together, IFAC believes that a realistic assessment would see borrowing remain above 1 per cent of national output by 2025, compared to the official forecast that it will be close to balance at that stage. The huge uncertainties as we emerge from the pandemic make such forecasts very difficult. But the underlying point in the IFAC analysis is that, given the additional spending commitments in the last budget, the Government will need to raise taxes or cut spending elsewhere to afford any further planned spending increases.
Ministers Paschal Donohoe and Michael McGrath have said that a return to growth will do the “heavy-lifting” in terms of returning the public finances to balance after the pandemic. IFAC does not dispute this, but it cautions that there are risks, that a strategy is required and that new revenues will be needed in the years ahead. Given the political challenges of this, facing up to the trade-offs is likely to take some time.