Keeping pace with inflation could cost additional €7.5bn in Budget 2023 - watchdog

About 90 per cent of inflation supports announced in recent months “were not targeted”, meaning they helped everybody rather than more so helping lower-income households “who spend more on energy and food”— Ireland’s budget watchdog has said.

The comment comes as the Irish Fiscal Advisory Council (Ifac) warned the Government will have to strike a careful balance between its spending priorities to avoid overextending the public finances and further stoking inflation in Budget 2023.

To fully track expected wage and price increases this year and next, expenditure would have to be increased by almost €7.5 billion in Budget 2023, Ifac estimated in a pre-budget submission published on Wednesday. This would allow the Government to raise core social welfare and pension payments in line with expected inflation while delivering public sector pay increases of 6.6 per cent and implementing planned capital spending increases.

However, this would “exceed the available space” under the Government’s spending ceiling, delivering an annual spending increase well in excess of the 5 per cent per year rule the Government set for itself last year. Having already opted to pause the spending rule this year, the larger budget package unveiled in the Summer Economic Statement outlines that core spending will increase by €4.5 billion or 6.5 per cent in 2023, Ifac said.

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This is a “prudent” and “sensible” decision, in the council’s view, given the “exceptionally high rate of inflation”. But it indicates that the Government will have “to make difficult choices ... between maintaining the real value of public services and supports, sticking to its capital plans, increasing spending elsewhere, or raising additional revenues.

“One thing that could help them to help strike a better balance and help them to make this choice would be better targeting of support measures to those who most need them,” said Ifac chairman Sebastian Barnes, who told reporters that an estimated 90 per cent of inflation supports announced in recent months had not been targeted.

“Targeting would really help to allocate these resources,” he said.

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Ifac issues regular assessments of Ireland’s budgetary position. However, the Government is not obliged to follow the advice of the group which was put in place in 2011.

Ifac also warned that the Government must set out how it plans to achieve its medium-term objectives, including its commitment to cutting greenhouse gas emissions in half by 2040, for which “it has not factored in the full costs”.

The Government has also not yet costed its Sláintecare reforms beyond this year, neither has it “responded to the Pensions Commission recommendations on addressing pension funding shortfalls”, Ifac said.

“The Government needs to make choices about how to address these challenges, including how it intends to reallocate spending from other areas and/or raise taxes”, the watchdog warned.

On the revenue side, Ifac said the Government is likely to run a surplus this year above what was projected in April’s Stability Programme Update.

“This has been largely driven by strong corporation tax receipts, which are currently €1 billion in advance of forecasts,” Ifac said, with overall tax receipts €1.9 billion in advance of the April estimates by July.

Stripping out corporation tax receipts, the Government balance would be in deficit to the tune of €5 billion this year, Ifac chief economist Eddie Casey told reporters in advance of the submission’s publication.

The State’s “over-reliance” on these “risky revenues”, the lion’s share of which are generated by just a handful of multinational corporations, should be reduced by making contributions to a rainy-day fund or recreating the National Pensions Reserve Fund, Ifac said.