Fiscal council warns €6bn vital to maintain services

The Government needs to find an extra €6 billion just to maintain the existing level of public services over the next five years, the State’s financial watchdog has warned.

The Irish Fiscal Advisory Council (IFAC) said its "standstill" estimate of expenditure reflected the likely spending pressures posed by inflation and changes to public sector pay alongside an ageing population.

In its latest economic assessment, it claimed the Government’s medium-term projections for the economy “significantly understated” these pressures and failed to give “an informative picture” of the public finances after 2016.

Prior to the last election, Minister for Finance Michael Noonan was challenged over his claim that €12 billion in "new budgetary commitments" would be available to the next government over the following five years.

Either way, the council suggests roughly half of the Minister’s estimate of available resources would be needed just to maintain public services at the current level even before tax cuts and spending hikes could be considered.

In its report, it said recovery in the Irish economy had been impressive, with a combination of rapid job creation and low interest rates helping to alleviate the legacy of the crisis.

It also welcomed the commitment in the programme for government to abide by the EU’s fiscal rules.

However, it said the document lacked essential details in terms of the costing of measures and how policy initiatives fitted the fiscal space available. “There is uncertainty about the fiscal position over the coming year owing to a lack of published detail on the commitments in the programme,” the council said.

It also noted that the Government’s capital spending plans, which involved an additional €4 billion a year to 2021, were extremely modest by historical and international levels.

It calculated that after allowing for depreciation of the State’s existing stock of infrastructure, the annual increase in spending would only be 0.3 per cent.

Risk factor

“Maintaining public capital investment at such low levels might be difficult to sustain, taking into account unmet demand following years of curtailed investment since 2008, current projections for economic growth and future demographic changes,” the report said.

Another risk factor highlighted by the fiscal council was the current surge in corporation tax receipts, which has delivered a cushion for the exchequer of nearly €800 million so far this year.

IFAC chairman John McHale cautioned that much of this revenue was unexplained and had come from a small number of big corporations and might disappear as quickly as it arrived.

The council said the scope for additional budgetary spending via the supplementary estimates this year had been largely closed off, restricting the Government from using it for ongoing overruns in health.

Mr Noonan has already signalled space for an adjustment of about €900 million in the next budget.

Given the projected growth of the economy, this would be consistent with a “modestly contractionary fiscal stance,” Prof McHale said. “We see this as appropriate given the stage in the business cycle and the legacy of high debt.”