Budget watchdog urges Government to keep spending rule

The Government should keep its fiscal rule in the autumn budget, limiting spending increases and saving most or all of the windfall corporation tax receipts currently flooding into the Exchequer, the Fiscal Council will warn today (Friday).

In a presentation to the Oireachtas Budgetary Oversight Committee this evening the Government’s spending and budget watchdog – set up in the wake of the financial crash to advise governments on not repeating the mistakes of the past – will urge a prudent approach to the coming budget.

“The council assesses that it would be appropriate to stick to the National Spending Rule from 2024, given the exceptionally tight labour market, high inflation, capacity constraints, and risks associated with corporation tax receipts,” the council will say in its opening statement.

The Government introduced its spending rule to limit increases to the underlying level of growth in the economy in 2021, but abandoned it for last year’s budget. Sticking to it this year would mean limiting budget spending increases to about 5 per cent, a level which few observers, insider or outside government, think will be met.

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But the Fiscal Council says that if the Government raised taxes in some areas it could spend more in other areas and still stick by the rule.

The council also estimates the windfall tax receipts at a slightly higher level than the Government, and warns: “These windfall receipts should not be relied on to fund permanent spending. Spending these revenues, which come from worldwide activities, would risk adding to overheating in the Irish economy. Meeting the spending rule would require choices about taxation and spending,” the council says.

IT also warns about a repeat of extensive one-off spending measures that were included in last year’s budget. “While one-off fiscal measures were appropriate to address recent cost-of-living pressures they cannot serve as a long-term solution. With energy prices lower there is now less justification for one-off supports, although contingencies could be built in for next winter in case of need at that time.”

The council approves of plans to set aside some or all of the windfall receipts in a savings fund, noting: “The savings vehicle proposals could help to manage the inflow of corporation tax receipts and address longer-term challenges. The vehicle could reduce the risks of repeating the mistakes of the 2000s: using unreliable revenues to fund permanent tax cuts and spending increases.

“The council assesses that saving windfall corporation tax receipts to address ageing-related costs would be beneficial given the substantial risks to the economy and public finances from using these to fund ongoing commitments,” it says.

“This presents a huge opportunity to finally tackle a substantial portion of ageing costs – something still not addressed considering that plans to increase the pension age were abandoned.”