Analysis: Scope for election largesse is getting smaller

The Irish Fiscal Advisory Council will not be intervening in the election debate come the new year, but its assessment of Budget 2016 points to huge challenges for all parties as they prepare their economic plans.

Although the budget has been endorsed by Brussels, the Council’s report is salutary: spending is increasing too quickly, even though the 2016 package complies with the letter of the fiscal rules.

Moreover, the council says the budget does nothing to rectify weakness in medium-term plans for the public finances. And continuous upward revisions to spending are undermining the system of expenditure ceilings, which is supposed to constrain spending pressure.

With the election campaign imminent, problems are piling up in the background even amid rapid economic growth. There is no buffer for any health spending overrun in 2016 – and the corporate tax surge is an unreliable revenue source to fund permanent increases in expenditure.

Break this down. The council had no real problem with the Government’s original plan for a fiscal package between €1.2 billion and €1.5 billion, divided equally between spending increases and tax cuts. But the €1.5 billion plan unveiled last month was preceded only days earlier by separate steps to boost year-end spending in 2015 by €1.5 billion. This was rolled into the 2016 allocation before €750 million in new spending on Budget day, bringing the net spending rise to €2.25 billion.

Requirements change

The Government will still bring the headline budget deficit below 3 per cent this year as it is obliged to do. However, the requirements change once this target is achieved. If the 2016 requirements applied in 2015, the Coalition would not have met its obligations. That the budget does not actually break the rules gives the Government cover.

Still, the council finds serious fault with the Coalition’s medium-term projections for relying on technical assumptions which “do not present a realistic picture” of the public finances. “Funding current levels of public services in future years and accommodating likely expenditure needs would absorb the majority of the estimated fiscal space available after 2016,” it says. “Further tax cuts would make it very difficult to fund these expenditure pressures while complying with the rules.”

This is crucial. Budget 2016 is already a wrap, but next comes the election. After prolonged austerity, a multitude of campaign promises on tax and spending is in prospect. In the Council’s assessment, however, the scope for largesse is not large at all. For all the political rhetoric, the fiscal stance will have to remain pretty tight if the next administration is to comply with the rules.