‘Lack credibility’: Fiscal council warns Government over spending forecasts

Watchdog says Government’s forecasts do not reflect policy commitments

Minister for Finance Paschal Donohoe. Ifac said the Government was “painting too rosy a picture” of future tax revenue. Photograph: Gareth Chaney/Collins

Minister for Finance Paschal Donohoe. Ifac said the Government was “painting too rosy a picture” of future tax revenue. Photograph: Gareth Chaney/Collins

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The Irish Fiscal Advisory Council (Ifac) has warned the Government that its budgetary forecasts “lack credibility” and are inconsistent with future spending commitments.

In its latest assessment of the public finances, the fiscal watchdog said the Government’s financial projections were based on technical assumptions that did not reflect the full cost of providing core spending commitments.

It also said the Government was “painting too rosy a picture” of future tax revenue and underestimating the likely decline in corporation tax receipts arising from proposed changes to the global tax system.

“The official budgetary forecasts are poorly founded, major policy commitments are not built in, and the promised medium-term strategy has not been delivered by the Government,” the council said.

In its recent stability programme update, the Government forecast that its budget deficit – the difference between what it spends and what it generates in taxes – will narrow to 0.3 per cent of national income or €805 million by 2025 as the economy recovers and pandemic-related measures are phased out.

However, Ifac takes issue with this calculation. “More realistic projections” – consistent with Government plans to index the tax system as well as price and demographic pressures on regular spending – would result in a deficit of more than €3 billion or 1.2 per cent of national income, it estimated.

Implementing Sláintecare’s health reforms would add even more to that, the council said, while noting “the Government has not been clear on how much this will cost over the coming years and how it will be funded”.

It said the decision to extend pandemic support measures was appropriate, but large permanent increases would not be “prudent”.

Budget 2021 included “substantial and permanent” increases in spending amounting to at least €5.4 billion without long-term funding, and up to €8 billion if non-exchequer spending is included, it said.

Corporation tax

The council said there are significant risks to corporation tax receipts. The Government has assumed a gradual €2 billion reduction in corporation tax receipts up to 2025 as a result of global reforms. But a scenario considered in Ifac’s report shows how just five firms exiting Ireland could result in €3 billion of lost corporation tax receipts.

Ifac said the Irish economy was likely to bounce back quickly as restrictions ease and as vaccines are rolled out.

“The Government’s relatively cautious projections assume deep scarring on the post-pandemic economy, yet the council sees more upside potential to growth,” it said.

Better-performing sectors may be able to pick up the slack more quickly while the unwinding of savings could significantly boost consumer spending, it said.

“If the economy recovers strongly as anticipated, a large-scale, untargeted stimulus would not be needed,” it said. Instead, the council advocated a more targeted approach, reducing supports in a gradual way while supporting those most affected.

Despite its upbeat outlook, it mentioned several risk factors, including virus mutations, which might necessitate further lockdowns; international tax reforms, which could reduce foreign direct investment; and further adverse impacts from Brexit. While Ireland’s debt ratio is likely to be high coming out of the crisis, the debt ratio is made more sustainable by lower interest rates.

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