Budgetary strategy undermines Government’s credibility, Ifac claims

The Irish Fiscal Advisory Council (Ifac) has strongly criticised the Government’s plan to breach its own spending rule in the upcoming budget, claiming it “repeats a pattern and undermines the credibility” of the Coalition.

In a series of tweets, the budgetary watchdog said the Government’s revised strategy, which involves additional spending and tax measures, risked “making high prices more persistent”.

“The Government’s revised plans exceed those set out three months ago as well as breaching the spending rule,” it said. “This repeats a pattern and undermines the credibility of the Government’s plans and the spending rule itself,” the council said.

“This is a clear case of procyclical fiscal policy,” it added.

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In the summer economic statement, published on Tuesday, Minister for Finance Michael McGrath and Minister for Public Expenditure and Reform Paschal Donohoe signalled the Coalition was planning a package of about €6.4 billion for October’s budget, meaning it would breach its own guidelines.

The spending package is €1 billion greater than the trajectory set out in the Government’s stability programme update (SPU), published just three months ago, meaning core spending would rise by about 6.4 per cent in 2024, exceeding the Government’s own 5 per cent spending rule. The tax package is also €600 million bigger than previously flagged.

The Government’s budgetary plans “come at a time when unemployment is at record lows, and inflation remains high”, Ifac said, noting “capacity constraints are already apparent, with worker shortages evident in the economy”.

It claimed the “additional stimulus” to the economy was likely add 0.1-0.2 of a percentage point to the annual rate of inflation in the short term. “This also risks making high prices more persistent as a result,” it said.

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The council also took issue with the Government’s “windfall capital investment”, saying it should be accounted for properly as core spending and the approach was “bad for transparency”.

“When one correctly accounts for the additional capital spending, the Government is planning to break the spending rule every year out to 2026,” Ifac said.

Taoiseach Leo Varadkar said on Thursday that he would “respectfully disagree” with the views of the Irish Fiscal Advisory Council.

“As a government we have to listen to advice from all quarters. But we have made a balanced decision – listening to not just advisory bodies but also unions, employers, NGOs, the general public.

He said the ”crucial point . . is we’re not going to spending the windfall corporate tax receipts.”

“We’re going to run a very large budget surplus as a result and use some of it to pay down our debt – so to my mind anyway that passes the test of prudence and responsibility,” Mr Varadkar added.

“If we were to stick the five per cent spending limit, which I know IFAC have recommended, it just wouldn’t allow us the space that we need to make sure that people aren’t worse off – pensioners, people with disabilities, carers . . [It] wouldn’t allow us to pay our public servants properly, wouldn’t allow us to improve on services and infrastructure, and to me in the round, that wouldn’t have been the right decision.”

He said that the Government wasn’t breaking any European treaty rule -- “we’re entirely within all those international rules,” he said.

“It’s our rule and it’s open to us to change it,” he said.

At the publication of the summer economic statement, Mr McGrath insisted the strategy sought to strike a balance “between investing to deliver improvements in public services, while minimising the impact of fiscal policy on inflation and maintaining the public finances on a sustainable trajectory over the medium term”.

On the plan to breach the spending rule, he insisted “the parameters” of the rule had been “temporarily” suspended to reflect the “highly elevated inflationary environment”. The rule has been broken every year since it was adopted in 2021.

Ifac said there were risks of spending overruns this year in the areas of health, children and social protection, while noting “medium-term fiscal challenges remain to be addressed, including the costs of population ageing, climate change and the costs of implementing health reforms”.

“While tax revenue may perform better than forecast in the coming months, this cyclical upswing in revenue does not provide scope for additional measures in the budget,” it said.

Half-year exchequer returns published on Tuesday show the Government collected just under €41 billion in taxes so far this year, 11 per cent or €4 billion more than the same period last year. The increase was driven by continued growth in corporation tax, income tax and VAT.