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Ireland’s budgetary watchdog barks over ‘large, permanent increases’ in government spending

Erik G

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THIS MORNING, THE State’s budget watchdog bangs a familiar drum — one it’s been banging for the best part of a decade.

Once again, the Irish Fiscal Advisory Council (IFAC) has called on the government to clarify its medium and longer-term spending plans.

The trouble, IFAC says, isn’t necessarily that the plans for 2021 are pie-in-the-sky or that the economy is in particularly bad shape heading into the second half of the year. In fact, the watchdog says that maintaining the Covid-related supports rolled out at the height of the pandemic last year has been necessary in 2021 and put the economy on a better footing.

Moreover, IFAC says Ireland’s debt pile, which was already substantial before the pandemic, is currently more or less “sustainable” because of the current low interest rate environment.

But while maintaining costly economic supports was vital in 2021, IFAC — echoing recent statements by the Central Bank — says that “large, permanent increases” in current expenditure amounting to €5.4 billion in the last Budget ”were not prudent” without “long-term funding”.

Those spending increases — across key areas like health, education and social protection — could rise to €8 billion if non-exchequer funding for local authorities and approved housing bodies is included.

In a nutshell, “It means the space available to fund the commitments in the Programme for Government—without raising taxes or cutting other spending—was essentially already used up in Budget 2021.”

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“Poorly founded” medium-term spending plans mean that that tax receipt growth is “unrealistically” forecast and details about the cost of major reforms like Sláintecare are thin on the ground beyond 2021.

Against this backdrop, IFAC says that the government needs to set out a “credible medium-term strategy”. It can no longer rely on substantial year-on-year growth in corporation tax windfall to fund new spending given the international appetite for business tax reform

Despite growing global pressures, Minister for Finance Paschal Donohoe told Sky News that he believes Ireland’s 12.5% corporate tax rate can be maintained long into the future.

But IFAC believes if proposed global tax code changes go ahead and just five of the biggest firms headquartered in Ireland depart for greener pastures as a result, it could shave €3 billion off Ireland’s receipts by 2025, €1 billion ahead of the Department of Finance’s projections.


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