EU warns budget will have to limit tax cuts and spending

Ireland will have to make a "substantial fiscal effort" in the upcoming budget to stay within the provisions of the EU's fiscal rules, the European Commission has warned.

In its latest round of country-specific recommendations, Brussels warned that because of last-minute changes to spending in budget 2017, Ireland was now at risk of deviating from its budgetary targets in 2018. As a result, it recommended limiting the scope of tax cuts and spending increases in the forthcoming budget while adopting additional measures to broaden the tax base.

However, employers’ group Ibec claims the commission’s cautious assessment would limit the fiscal space available by €7 billion and failed to appreciate the chronic level of under-investment in infrastructure here.

While Budget 2018 is expected to allow for a €1.2 billion adjustment, the real room for manoeuvre could be as little as €570 million because of the carry-over effects of measures contained in Budget 2017.

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The commission also cautioned against using any windfall gains such as proceeds from asset sales for anything other than reducing national debt.

The Government stands to make around €3 billion from the sale of a 25 per cent stake in AIB, but is constrained from using the money to resolve some of the State's infrastructural bottlenecks by the fiscal rules.

Minister for Finance Michael Noonan said the commission's recommendations were "usually fairly sound" and would be taken on board when designing Government policy.

However, speaking on his way into a meeting of euro zone finance ministers in Brussels, he said any presentation to a parliament had to be conscious of the political background as well as the financial constraints on a country.

Employers’ group Ibec claimed the commission’s cautious assessment would limit the fiscal space available by €7 billion and failed to appreciate the chronic level of under-investment in infrastructure here.

Ibec’s director of policy Fergal O’Brien said the report failed to acknowledge the 26 per cent jump in GDP recorded in 2015 in order to limit future allowable public spending growth.

“The cost of this in terms of reduced fiscal space for the Government could be in the order of €7 billion over the years 2018 to 2021,” he said.

He said a more accurate assessment of the economy would be to support Government use of the windfall corporation tax receipts for much needed one-off public capital projects.

In its budgetary assessment the commission said while economic recovery in Ireland was robust with output expected to grow at a solid pace, the outlook had become more uncertain, creating risks for the still fragile public finances. “Therefore more efforts should be taken to make revenue more resilient to economic fluctuations and adverse shocks,”

Rainy-day fund

Specifically, the commission said the Government’s plan to introduce a so-called rainy-day fund as a buffer against future shocks should be advanced.

It also advocated reducing the Government’s reliance on highly concentrated and volatile revenue sources.

The Government has been criticised for using an unexpected windfall in corporate tax receipts to boost public spending. “A balanced composition of different tax sources and broader tax bases improve revenue stability in the face of economic volatility,” it said.

The commission said efforts to broaden the Irish tax base had been limited, while recent tax measures had been focused on cuts and reliefs.

It noted that the Government’s cost/benefit analysis of the reduced VAT rate for the hospitality sector was pending.

The commission said while property taxes were considered to be one of the most growth-friendly revenue sources, Irish revenues from “immovable property” only amounted to 1 per cent of gross domestic product (GDP) in 2014, compared to an EU average of 1.6 per cent.

Housing

The commission said the most severe infrastructure shortcomings in Ireland were in transport, water services and housing.

It noted that demand for new housing currently exceeded supply “by a wide margin” in the State’s main urban areas. “As a result residential property prices and rents continue to increase rapidly, in turn resulting in a recent high increase in housing exclusion and homelessness.”

However, it concluded that there was currently no evidence of overvaluation in the property market, but constraints limiting the supply of housing could generate macro-financial risks if they were not resolved. “A coherent and timely spatial plan would help to deliver new homes in the right areas,” it said.