Budget 2024: Coalition set to breach own spending rules for second year in row

There is a growing expectation that the Government will breach its own budget spending rules for the second year running, with Coalition figures of the view that it is “unrealistic” to deliver a budget that limits growth in core spending to 5 per cent.

The Summer Economic Statement (SES), a key piece of the pre-budget architecture outlining the intended size of the tax and spending package for 2024, is to be published this week.

However, sources over the weekend were of the view that the 5 per cent rule would be breached again for a second year running.

One source involved in discussions on the matter said Coalition leaders and Minister for Finance Michael McGrath and Minister for Public Expenditure Paschal Donohoe “are accepting the fact that we can’t get to 5 per cent”, describing the limit as “unrealistic” and “too much of a jump too soon”.

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In 2021, the Government adopted a 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 Budget 2023 with the Government blaming exceptional pressures for the social welfare package in particular - with weekly core rates going up by €12.

Reports over the weekend suggested the Government was preparing a spending package of more than €5 billion

Breaching the rule for a second year running would be likely to invite criticism from the State’s budgetary watchdog, the Irish Fiscal Advisory Council (Ifac), which earlier this summer warned the rule should be adhered to “given the exceptionally tight labour market, high inflation, capacity constraints and the risks related to tax receipts”.

Acceptance by the two Ministers that the rule would again be breached would not signal a budget free-for-all, however, despite the political pressure to deliver one. Mr Donohoe and Mr McGrath are instead expected to try and keep the breaches as low as possible and move back towards the 5 per cent level.

A second source predicted that spending would be slightly over the threshold but that there would be “no major extravagance”. They said it would not be more than 6 per cent. This time last year, the Coalition agreed to increase spending by 6.5 per cent this year, and ultimately allocations made at budget time were 7 per cent above the previous year’s levels.

Mr McGrath signalled earlier this year that he wanted to use the windfall corporation tax receipts to establish a long-term public savings investment fund

Talks on the statement continued over the weekend, with several aspects still to be nailed down, including the final structure of plans for what to do with the anticipated €65 billion surplus projected to flow into the exchequer in the next three years.

“There’s a lot of things still to discuss,” a source involved in the talks said.

Mr McGrath signalled earlier this year that he wanted to use the windfall corporation tax receipts to establish a long-term public savings investment fund. Other options under consideration include paying down debt or increasing infrastructure investment. Minister for Housing Darragh O’Brien has sought increased capital allocations for the Land Development Agency, including a plan to more than double its capital budget to €7 billion.

Breaching the rule for a second year running would be likely to invite criticism from the State’s budgetary watchdog, the Irish Fiscal Advisory Council

Reports over the weekend suggested the Government was preparing a spending package of more than €5 billion, with core spending rising by more than €4 billion and taxes cuts of more than €1 billion being introduced.

The Coalition faces a challenging balancing act not only to keep close to what its own spending watchdog has recommended, but also to avoid driving further inflation with budget interventions.

However, there is a political imperative to improve standards of living, with polling indicating that voters have a preference for improved services in areas like healthcare, as well as investment that would tackle chronic affordability and supply issues in the housing market.