Difficult choices needed in Budget 2023, warns watchdog

Irish Fiscal Advisory Council says Government policy cannot permanently shelter economy from inflation

The Government must make “difficult choices” in Budget 2023, given the “limited space” for new policy initiatives beyond cost-of-living measures, an Oireachtas committee has heard.

On Wednesday, the State’s budget watchdog, the Irish Fiscal Advisory Council (Ifac), warned TDs and Senators that the Government faced a “delicate balancing act” between shielding the economy and the most vulnerable from inflation without further fuelling upward price pressures. Echoing recent analysis by the Central Bank of Ireland, Ifac chairman Sebastian Barnes also warned that the Government should look to reduce its reliance on corporation tax receipts to fund spending increases.

Last week the Government published its summer economic statement, setting out the overall strategy and parameters for the upcoming budget. In it the Government noted that it was likely to run a budget surplus this year of about €2 billion. However, it said this was largely driven by excess corporation tax receipts and that without them it would be likely to record a deficit of about €7 billion.

Ministers also confirmed last week that Budget 2023, which is to be delivered on September 27th, two weeks earlier than scheduled, and will involve a €6.7 billion package of spending and tax measures to be announced on the day — an increase of €1.7 billion over previous plans. Having suspended its normal budget spending rules to allow it to address cost-of-living issues, the Government is expected to unveil a big package of “one-off” supports as part of the budget.

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Appearing before the Joint Oireachtas Committee on Finance, Public Expenditure and Reform on Wednesday, Mr Barnes said it was “sensible to allow some leeway” around the Government’s spending rules during this period of high inflation. However, he said “fiscal policy cannot permanently shelter the economy as a whole from higher prices”. Despite the “urgency of current pressures, it’s important to maintain the economy and the public finances on a sustainable path”.

Against that backdrop, he said the parameters of the summer economic statement would “strike a reasonable balance between creating space to support the economy and more vulnerable households” and also “avoiding adding to inflation by increasing demand excessively in an already inflationary environment” but that the Government still faced a “delicate balancing” act on this front.

Overall, he said the strength of the pick-up in consumer price inflation over recent months, driven mainly by soaring energy prices following the Russian invasion of Ukraine in March, had not been anticipated.

Globally, inflation projections have been revised higher in recent months while expectations for growth have been pared back, Mr Barnes said.

“Despite this, recent economic data for Ireland remains robust. Consumer credit card spending has continued to grow in recent months. Employment and tax receipts remain strong,” he said.

“Nevertheless higher inflation is likely to lead to the first annual fall in overall household real income in a decade,” Mr Barnes said, creating “real hardship” for low-income households, which spend proportionally more of their disposable income on energy and food.

Limited space

While an additional €2.7 billion in permanent core spending is yet to be allocated, a relatively large amount compared with previous budgets, much of this is likely “to be required to stand still in terms of maintaining existing levels of public services, welfare and pension rates”, given the trajectory of inflation.

As such, Mr Barnes said “there is very limited space for new policy initiatives beyond cost-of-living measures”.

In its latest quarterly bulletin, the Central Bank warned last week that as much as €8 billion or just over half of the Government’s corporation tax receipts might be “unsustainable” or at risk.

Although the summer economic statement did not revise the Government’s full economic and budgetary forecast, “stronger than expected tax receipts” had led to a new official projection for a budget surplus in 2022, “one year earlier than expected”.

However, Mr Barnes said the State’s over-reliance on corporation tax “flatters the picture”, given that the lion’s share of Ireland’s corporate tax take is “excess compared to fundamentals”.

“This implies that the current surplus is actually equivalent to a substantial deficit,” he said, adding that a large share of this revenue is generated by just a handful of companies.

Mr Barnes said: “While these revenues could remain strong for some years, they depend on developments and decisions made outside Ireland. These revenues are volatile and subject to the risk of a sudden large fall.”

The Government should take measures to reduce its reliance on corporation tax by capping and reducing how much of this money is spent, he said. This could also be achieved by using the money to pay down debt quicker, making contributions to a rainy-day fund or recreating the National Pensions Reserve Fund.

Ian Curran

Ian Curran is a Business reporter with The Irish Times