The Government’s repeated breaching of its own spending rule has resulted in €6.6 billion of additional expenditure since 2021, the Irish Fiscal Advisory Council (Ifac) has warned. It also accused the Government of using “fiscal gimmickry” to flatter its budgetary numbers, noting that several items included in Budget 2024 were labelled as “non-core” or temporary spending when they were likely to persist. These included Covid-related health spending, supports for Ukrainian refugees and capital spending increases labelled as “windfall”.
In its latest fiscal assessment report the budgetary watchdog claimed the Government was adopting an “everything now” approach to budgeting by simultaneously announcing tax cuts, a ramp-up in capital spending and increases to current spending.
It said October’s budgetary package amounted to almost €12 billion in additional spending and tax measures, which was roughly three times larger than the pre-Covid packages. “It entails using strong tax receipts in good times to expand the budget quickly at the risk of adding to price pressures, getting bad value for money, and potentially having to reverse measures in a downturn,” Ifac said, adding that such an approach risked repeating the “mistakes” of the past.
Immediately after the budget Ifac claimed that one-off measures announced, which included three further €150 energy credits, ran the risk of further fanning inflation at a time when it was falling and the economy was growing.
The main thrust of the council’s latest criticism centred on the Government’s inability to adhere to its own 5 per cent spending rule, which it described as “deeply concerning”. The spending rule seeks to keep the annual increase in government spending inside a 5 per cent ceiling, which is viewed as sustainable for the Irish economy. It was adopted in 2021 but has been broken every year since.
The spending rule has taken on greater significance in Ireland as the incoming EU fiscal rules are unlikely to prove binding as they are linked to Ireland’s inflated GDP (gross domestic product) measure.
“Worryingly the Government has already signalled that it will continue to breach the rule in later years even as inflation recedes,” Ifac said.
Since it was introduced Ifac said budgetary measures are cumulatively €6.6 billion (7.5 per cent) above what would be implied by a 5 per cent path. “Budget 2024 was marked by exceptionally bad budgeting, most notably in health,” said acting Ifac chairman Michael McMahon.
The council’s report said overruns in health, which were obvious before budget day, were not catered for sufficiently. “As well as that the national spending rule was substantially undermined through a mix of gimmickry and plans to repeatedly breach it,” Mr McMahon said. “The rule needs to be adhered to if Ireland hopes to sustainably meet challenges of rising costs related to pensions, healthcare and long-term care as well as its climate transition.”
On the wider economic performance the council said the Irish economy continued to be “resilient” in the face of numerous pressures, including inflation, increasing interest rates and international risks. While the official forecasts “paint an encouraging picture for the public finances”, Ifac said the Government’s future spending projections failed to take account of age-related pension costs and additional outlay related to the climate transition.