The Government will struggle to keep spending growth in line with budget rules put in place in recent years, Coalition insiders believe, despite warnings from the State’s fiscal watchdog over the risks of political pressure on spending decisions.
In 2021, the Government adopted a 5 per cent National Spending Rule that effectively seeks to tie core expenditure growth to the estimated sustainable nominal growth rate of the economy, at 5 per cent per year.
However, this rule was abandoned for this year’s budget with the Government blaming exceptional pressures arising from inflation which led to permanent increases in spending, for example in the social welfare package – with weekly core rates going up by €12 in Budget 2023.
Coalition sources now privately believe it will be “challenging” to stay within this rule for Budget 2024, although they warn that breaching it is not without risks. One senior Government source said the approach would be about “keeping manners” on any overspend and ensuring that any breach was justifiable. Another said returning to the rule “needs to be thought about” and that while a giveaway budget would not be wise, a “standstill” package wouldn’t be warranted either.
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The Irish Fiscal Advisory Council (Ifac) on Wednesday told the Government it should stick with the rule “given the exceptionally tight labour market, high inflation, capacity constraints and the risks related to tax receipts”.
[ Political pressure for tax cuts now ‘poses risk to public finances’Opens in new window ]
The rule limits net spending growth to 5 per cent each year, the watchdog said, “so that permanent policy measures match trend growth rates and are broadly sustainable”. It said the rule helped stabilise the economy and avoided fuelling further price pressures when the economy’s wider capacity was constrained.
However, the watchdog itself admitted that keeping to the ceiling would leave “little space” for other measures in the budget, with the cost of maintaining public services at their current levels estimated to be €5.6 billion. The Government will face a difficult balancing act and myriad demands to use the health of the exchequer to counteract pressures on households and businesses, notwithstanding the Ifac advice.
Another Coalition source said that the spending rule was determined on the basis of net spending and the ceiling would be different based on tax changes. Fiscal projections published by the Government assume a reversion to the 5 per cent rule, but insiders said the appropriate policy would be considered as part of the Summer Economic Statement (SES).
Speaking on Wednesday, Minister for Public Expenditure Paschal Donohoe said his colleague Minister for Finance Michael McGrath would “carefully consider” the Ifac comments, but told RTÉ radio there was a “bigger picture” for Budget 2024 and that the Government had not spent additional levels of corporate taxes taken in in recent years.
[ Strong exchequer numbers likely to increase clamour for tax cutsOpens in new window ]
Mr Donohoe said that, in the past, as minister for finance, he had listened to the advice of the Ifac which in turn had acknowledged previous budget strategies as appropriate.
Speaking in Belfast, Tánaiste Micheál Martin said there would be tax relief for voters and additional spending on public services but “the precise details of all of that will have to be worked on with the Government and the first step would be the Summer Economic Statement”.
The National Economic Dialogue will be convened next week, in advance of the publication of the SEC in early July – a key piece of the pre-budget architecture.
Fianna Fáil TD for Laois-Offaly Barry Cowen, who is chair of the Oireachtas Budgetary Oversight Committee, said Ifac’s advice would play a crucial role in the budgetary process and would be carefully considered, but that the body would “always err on caution” and be “ultra-conservative”. He said that “Government though has a wider brief and will consider social welfare and one-off measures assisting households dealing with ongoing cost-of-living matters.”
