The head of the Irish Fiscal Advisory Council (Ifac) made a rather sorry admission recently. Seamus Coffey said the council’s annual assessment of the budget – arguably its raison d’être – was being undermined by the Government’s failure to adhere to any sort of spending plan.
Budgets are drawn up and delivered every October only to be torpedoed by spending overruns and supplementary estimates the following year. This makes the council’s assessment of the budgets something of an Alice in Wonderland exercise.
“We’ve had a number of budgets outlined in October for a given year and then, as we went through the following year, whether it was within-year policy announcements or very significant spending overruns, we drifted away from those budgets,” Coffey told The Irish Times Inside Business podcast recently.
He said 2025 was perhaps the worst example. Spending for last year is expected to come in about €4 billion higher than what was set out in Budget 2025.
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“A body such as the fiscal council is set up to assess the budget, but I’m pretty sure that if we knew in the budget for this year (2025) there was going to be €4 billion of additional spending, our assessment would have been very different,” he said.
The Government’s sleight of hand is facilitated by the fact that when these budgetary overruns emerge “everyone is eyeing up what’s happening next year”, so warnings from Ifac and others get lost in the news cycle, Coffey said.
“Four billion euro of additional spending beyond what’s in the budget is very significant,” he said.
The council’s assessment of Budget 2025, delivered in December 2024, warned there was a real danger that budgetary policy had “lost its anchor”.
It cautioned that spending (based on the then government’s October numbers) was likely to increase by 6 per cent in 2025, “double the upper estimates of Ireland’s sustainable growth rate”.
Could the decision to spend most of next year’s corporation tax come back to bite the Government?
In the context of a €4 billion overrun, that now looks like an understatement.
Between the years 2019 and 2024, total gross expenditure here rose from just over €67 billion to €104 billion – an increase of €36.7 billion, or 54 per cent. That equates to average annual growth of 9.4 per cent – almost double what the government signed up to in 2021 with its 5 per cent spending rule.
That 5 per cent figure was what the government had deemed prudent.
Coffey said he wasn’t necessarily being critical of the quantum of spending so much as the lack of transparency behind it, but the quantum of spending is a big problem.
Loose spending is perhaps the moral hazard of having too much corporation tax.
New Minister for Finance Simon Harris has now promised to keep annual increases in net voted expenditure at 6 per cent for the next five years.
[ Simon Harris stakes reputation on new spending stricturesOpens in new window ]
But Coffey said that, even with the new 6 per cent stricture, announced in the Government’s Medium Term Fiscal and Structural Plan, the average annual growth in net spending between now and 2028 (a shorter time frame) will be 7.4 per cent.
This is 1.5 per cent higher than the next biggest spender in the EU – Malta – and double the amount planned by comparator countries like Finland, Belgium and the Netherlands.
What’s perhaps most worrying is not so much the annual spending increases but the fact that we’re spending our corporate tax boom so rapidly. It is an act of political expediency in a time of relative plenty that we will almost certainly regret when the tide goes out.
The Government plans to save just €1 out of every €7 it takes in corporation tax in 2026.
The Government expected to run a surplus of €10.2 billion in the year just gone, equivalent to 32 per cent of the expected corporation tax total of €32 billion. It has now signalled that it will run a smaller surplus of €5.1 billion in 2026, which equates to just 15 per cent of the expected corporation tax total that year of €34 billion.
Ifac expects corporate tax to increase by up to €3 billion from this year as big multinationals with a turnover above €750 million become liable to pay a new minimum tax rate of 15 per cent.
[ Six economic flashpoints to watch out for in 2026Opens in new window ]
The Government is scheduled to set aside just €6 billion in two wealth funds in 2025 and €6.5 billion in 2026. This isn’t going to create the economy-changing wealth fund that these receipts could create.
When the UK and Norway both discovered vast quantities of oil and gas in the North Sea in the 1970s, the British spent their new-found wealth as quickly as it came in while the Norwegians saved theirs.
Norway’s sovereign wealth fund, now valued at over $2 trillion, has transformed Norway’s economic fortunes. Perhaps more importantly, it ensures the country will stay wealthy for generations.
All things being equal, and mindful of the concentration risk of having just 10 firms responsible for 60 per cent of the receipts, Ireland’s corporate tax take is likely to keep accelerating in the medium term, potentially growing to €40 billion annually.
This is transformative wealth. There needs to be a more strategic vision behind it.
