The role of the Irish Fiscal Advisory Council (IFAC) as the State's fiscal watchdog is to bark loudly whenever the Government departs from prudent management of the budget and the economy. In its latest fiscal assessment report, the council has just done that. It has taken the Government to task for unexpectedly raising spending by €1.5 billion in the final quarter of 2015. This increase is in addition to the €1.5 billion in tax cuts and higher spending measures proposed in Budget 2016. The council said the Government's fiscal stance was a "deviation from prudent policy" and warned that it should not be repeated. This is the strongest rebuke to the Government since the independent agency was set up in 2011.
Budget 2016, as the council makes clear, complies with European Union fiscal rules – by bringing the budget deficit below 3 per cent this year – but is nevertheless against the spirit of the new budgetary framework. The council’s reasoning is clear: as the EU’s fastest growing economy, Ireland does not need a fiscal stimulus just now, particularly one that uses windfall tax gains to finance permanent spending increases that would be hard to reverse later should that be necessary.
Corporation tax revenues in 2015 are expected to be some €2 billion more – or 50 per cent higher – than first estimated. Many economists, however, worry about the volatility of tax receipts from that source. For the council, the Government’s budgetary stance “has worrying echoes” of past mistakes where pro cyclical fiscal policies reliant on transitory tax revenues – as in the housing bubble – greatly exacerbated the financial crisis that followed.
The council’s is also concerned that the Government’s medium-term projections for the economy “do not present a realistic picture” of the public finances. This, it warns, could present difficulties after 2016 in reconciling further tax cuts with greater spending pressures while staying within EU fiscal rules. It is a timely warning the Government, or its successor after next year’s general election, should begin to take seriously.