The Government’s budgetary stance is too “loose” and runs the risk of overheating the economy, the Economic and Social Research Institute (ESRI) has warned.
Echoing similar warnings from the Central Bank and the Irish Fiscal Advisory Council (Ifac), the institute said the Government’s proposed €9.4 billion budget for next year would add momentum to an economy already running close to its “potential output”.
Members of the ESRI appeared before the Oireachtas Committee on Budgetary Oversight to discuss the state of the economy and the upcoming budget.
“The last few years have provided a set of circumstances is which loose fiscal policy has been both warranted (Covid, cost of living crisis related to Ukraine) and facilitated (strong corporate tax revenues),” Alan Barrett, research professor with the institute, told the committee.
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“It could be argued that a degree of looseness inevitably continued in the run-up to the General Election in 2024,” he said.
“In Budget 2026, it is important that sound fiscal management moves to the fore again, including adherence to announced spending plans throughout 2026,” he said.
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His comments come amid an acceleration in Government spending over and above what was announced in last year’s budget.
Overruns in day-to-day spending are expected to top €2.5 billion this year as a result of greater-than-expected spending across several departments.
Mr Barrett said the Government’s budgetary stance should be countercyclical (run against the prevailing economic trends).
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However “Ireland’s fiscal policy looks procyclical right now, which creates immediate risks such as overheating,” he said.
“The challenge here is heightened by the need to fund a substantial level of capital expenditure (to address the State’s infrastructural shortfall),” he said.
Mr Barrett said overheating is often thought about in terms of inflationary pressures and price rises “but we are also concerned about capacity constraints that could hamper delivery of the National Development Plan and national housing targets”.
He also highlighted the fragility of Ireland’s budgetary position which was heavily reliant on windfall tax revenues from corporate tax which could easily evaporate quickly in response to factors such as legislative changes in the US.
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“History – in particular the economic collapse – provides a stark reminder that a vulnerability in the tax base can become a big problem if something arises to test the vulnerability,” he said.
Also appearing before the committee were members of the Irish Fiscal Advisory Council (Ifac) who called on the Government to make hard choices and prioritise in the upcoming budget.
It also warned that the current level of Government spending was procyclical.
“Government spending is faster than the sustainable growth rate of the economy,” Ifac chairman Seamus Coffey said.
“Given the strong position of the economy at present, the council would recommend a more modest budget package than what is currently planned,” he said.
