The Irish Fiscal Advisory Council (IFAC) launched an extraordinary broadside against the Government last week, accusing it of “bad budgeting”, repeating the mistakes of the past and using “fiscal gimmickry” to flatter its budgetary numbers.
The phrase “fiscal gimmickry” caught the headlines and elicited a robust response from the Minister for Finance, Michael McGrath. But what specifically was the budgetary watchdog referring to?
In broad terms, three things.
First, it takes issue with the Government’s distinction between core and “noncore” spending. Several items in Budget 2024 are labelled as “noncore” or temporary when they are almost certain to persist. These include Covid-related health spending and reduced public transport fares that were brought in during Covid but which now appear permanent.
Second, the council claims there are certain items that are woefully and perhaps deliberately underbudgeted for. Supports for Ukrainian refugees, which come to €2.5 billion in 2024, fall away to almost nothing the following year, which the council says is unrealistic.
And third, IFAC claims the Government’s budgetary strategy doesn’t factor in perhaps the biggest financial elephant in the room, the green transition, which is expected to cost the exchequer between €1.6 billion and €3 billion a year from 2026 on.
The Government is using “many techniques to present lower spending than is likely”, the council says, suggesting these were “deliberate attempts to game fiscal assessments”.
IFAC is known to have had a lengthy back-and-forth with the Department of Finance in an attempt to pin down – amid the many moving parts – the full extent of the spending hike encompassed by Budget 2024 but has been left frustrated. This may account for the ratcheting up of language.
In its report, the watchdog speculated that the recent adoption of a 5 per cent spending rule “is likely to have prompted” some creative accounting on the Government’s part. The rule, which the Government signed up to in 2021, aims to impose a 5 per cent ceiling on Government increases in spending, reflecting the long-run growth potential of the Irish economy (3 per cent) and a long-run inflation average (2 per cent); 3 per cent + 2 per cent = 5 per cent.
The latter part of this equation (the inflation bit) blew up in 2022 on the back of soaring energy prices, and the Coalition has used this to justify breaching the rule. But IFAC argues that inflation has now receded and that presiding over spending increases of this magnitude (the total budget package amounted to €12 billion, nearly three times the pre-pandemic average) when the economy is already running at close to full employment will be inflationary. It predicts inflation will be 2.9 per cent next year compared to 2.2 per cent if the Government had stayed within the spending rule.
Economists typically want governments to use fiscal policy to pull against the prevailing wind – in their terms, countercyclically, spending in a downturn and cutting back when the economy is running hot or close to full capacity. In other words, not add to demand pressures that the economy is already struggling to supply.
In reality, that’s a difficult political sell, particularly in the context of a housing crisis and a pronounced slide in living standards. There is also an election looming, with the Government parties trailing in the polls.
IFAC says the Coalition is avoiding difficult decisions and adopting an “everything now” approach to budgeting by simultaneously announcing tax cuts, a ramp-up in capital spending and increases to current spending. It highlighted that most (71 per cent) of the temporary cost-of-living measures contained in the budget, including three €150 energy credits, are untargeted and therefore not an optimal use of public resources.
In his response to IFAC, McGrath has insisted that the Government “struck the right balance” in Budget 2024.
“I would strongly argue that the Government’s decision to provide further cost-of-living supports to households in Budget 2024, many of whom remain under pressure from high energy costs and other day-to-day essentials such as grocery costs, was the right one,” he said.
IFAC’s critique came hot on the heels of another set of bumper exchequer returns, which demolished predictions that November (or 2023 as a whole) would see the first big reversal of corporation tax receipts in eight years. Receipts for the business tax hit a record €6.3 billion.
Government coffers were also bolstered by above-profile income tax and VAT receipts.
This put the Coalition on course to at least meet and possibly exceed a projected budget surplus of €8.8 billion in 2023 even though the economy is in a technical recession on the back of slower global growth.
IFAC’s criticism of the budget is now part of the financial calendar. The Government is under no obligation to act on foot of the council’s criticism and in the main doesn’t.
But far from being deflated by having its recommendations ignored or sounding like a broken record in calling on the Government to adequately budget for things such as an ageing population or the green transition, the council believes it has made a substantial impact on the public conversation.
“By making the case for some restraint and why it makes sense not to go down the path of the 2000s, we’ve helped cement the importance of the national spending rule,” the group’s chief economist, Eddie Casey, says. “There may be occasions when it is missed. But it’s nonetheless acting as an important anchor, and who knows what might have happened if it was not reinforced,” he says.
For his part, McGrath promises to study IFAC’s assessment.