I have written many pieces over the years about the advice the Irish Fiscal Advisory Council (Ifac) is giving to the government of the day and how ministers should pay more heed to it. There doesn’t seem much point in doing it again.
Irish politics – on the Government and Opposition benches – is driven by a debate about how the available money should be spent, rather than the risks of relying on a potentially risky flow of taxes.
Was anyone listening to Ifac’s latest warning about the reliance on corporate tax and the likely need to borrow money to invest in State funds, I asked one public servant this week. The – not entirely serious – reply was to ask whether I was referring to the Irish Farm Accounts Co-Operative, which advises farmers on their finances and shares the same initials. The political reality is that despite Ifac’s decade-long warnings, corporate tax has risen from €7 billion in 2016 to and estimated €34 billion his year – and the debate now is on how to spend it.
The risk is being the one holding the ball when the public finances do hit trouble or – worse – when the clean-up is being done. The Fianna Fáil-led government took a hit from announcing the bank bailout in 2008, and the Progressive Democrats, already in decline, never reappeared. Fine Gael and particularly Labour paid a heavy political price for the resulting cutbacks after they came to power in 2011.
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The fallout from this led to tight control on spending in the early years of the last decade and cuts to State investment for which the State is still paying the price. But since corporate taxes started to roll in from the middle of the last decade, successive governments have been generally happy to spend the proceeds.
A lingering undercurrent of concern about the rising reliance on corporate taxes did lead to the establishment by then-budget ministers Paschal Donohoe and Michael McGrath of two funds in 2024 designed to be a home for excess corporate tax revenue and to provide support for future budgets, set to come under pressure from an ageing population. The rules requiring annual contributions were drawn up tightly enough, particularly in relation to the Future Ireland Fund, the bigger of the two, designed not to be drawn down until the 2040s.
Now, as the somewhat tighter budget sums for next year are considered, the prudence trap set by Donohoe and McGrath has been sprung, and the mood behind the scenes in Government about these funds is mixed. The obligation to keep contributing is limiting budget leeway. But, for now at least, being seen to abandon this course would be risky. This will remain one to watch.
The Opposition, led by Sinn Féin, has the luxury of criticising the Government for running risks with the public finances while simultaneously supporting a whole range of spending demands
So the Government will carry on spending – at the fastest growth rate in the EU – and as Ifac pointed out, potentially borrow cash to meet the commitments in legislation to put money into the funds. This borrowing may not be needed in the short term, as State investment spending may again come in below target levels. But the Ifac warning does highlight one thing – the budget sums, slowly but surely, are starting to tighten, despite the whopping surplus of €9 billion forecast for this year.
While the money is there and households are struggling with the cost of living, there will only be one result. Jack Chambers, the Minister for Public Expenditure, has his work cut out trying to ensure that spending does not overrun again this year and is held to target next year. His colleague in Merrion Street, Minister for Finance Simon Harris, has missed no opportunity to promise measures to help households cope with energy bills and childcare costs, while also committing to lower taxes.
[ Chambers tries to play bad cop on spending while corporate tax receipts flow inOpens in new window ]
With the Fiscal Council calculating that most of the budgetary room for manoeuvre has already been used up due to existing spending commitments and overruns, there is going to be a big battle in Cabinet about Budget 2027. Chambers will try to hold his ground against the demands of the spending department, who will greet any caution from the Department of Finance about the outlook by pointing to their gross underestimate of the surplus for this year. The attitude of Harris and Taoiseach Micheál Martin will be vital.
The Opposition, led by Sinn Féin, has the luxury of criticising the Government for running risks with the public finances while simultaneously supporting a whole range of spending demands. Labour’s finance spokesman, Ged Nash, has been a rare political voice warning about public finance trends, telling the Dáil last year that runaway spending without taxes to match meant there was “a faint whiff of 2008 around the place”. In response to the Ifac warning this week, he said “it is not prudent or responsible to be using a very high proportion of taxes that could disappear overnight“ to build vital public services. And he added: “It is high time we had a serious and informed dialogue in this country about how we tax, who we tax, how we spend, and why.”
So the Government will keep rolling the dice. It knows it will get the blame if things do go wrong
He is right, of course. But this debate will not happen for as long as the corporate taxes keep rolling in. Ifac is dead right that the risks of Ireland’s reliance on a few big companies, their fortunes and their boardroom decisions, are rising ever higher. But its warnings are having less political impact.
On current forecasts, Government spending in 2030 will be twice the level it was in 2019. The Coalition, while accepting that infrastructure provision has been too slow, will argue that it has been building up the scale of the State in tandem with a rising population – and has done much to protect less well-off households. The largely left-leaning Opposition wants more to be spent on household payments and key services and an even bigger State role. There is little support in Leinster House for a low tax/lower spending agenda.
[ The Irish Times view on budget policy: on an increasingly risky courseOpens in new window ]
So the Government will keep rolling the dice. It knows it will get the blame if things do go wrong, but would face a significant political cost now for not increasing spending on public services and investment. Politics will continue to trump economics – until something goes wrong.
Some day, of course, it will. We just don’t know when, or what it will look like.
