There will be a temptation to dismiss the latest report from the Irish Fiscal Advisory Council (Ifac) on the basis that it has been making similar warnings for some years now. Certainly, it will not raise too much of a fuss politically, as the Opposition parties, rather than urging any restraint on the Government, are in many cases calling for even more to be spent.
Nonetheless, the report deserves careful consideration. It argues cogently that the Government is running ever-increasing risks with the public finances, spending the vast bulk of potentially volatile corporate tax revenues, most of it on day-to-day spending.
The argument is familiar, but the extent of the exposure is growing all the time. Five euro out of every six in excess corporate tax revenue is going to be spent in the years ahead, under Government plans. The budget surpluses will shrink. This means that the Government will have to borrow to meet legal commitments to put certain amounts of money into two savings funds it has established to support future budgets. The original intention of the funds was to put away cash coming from risky corporate tax receipts.
Just as the criticism is well-rehearsed, so are the proposed solutions. Ireland needs to be putting more corporate tax revenues aside each year, particularly as it faces predictable extra spending demands largely due to the ageing population. It needs a credible rule for the public finances. And promises to end the regular overruns in spending each year need to be delivered.
RM Block
Some on the Opposition benches argue that the Government needs to spend more, given the needs of the population. This fails to recognise that the increase in Irish net spending is already planned to be the fastest in the EU and will be well above the economy’s growth rate.
Much better to increase spending more sustainably now than face the need to make cutbacks if there is a fall in corporate or income tax revenues, or both. And much better to set enough funds aside to ensure that investment can continue if there is a setback to the public finances than to repeat the disastrous cutbacks in areas like housing which happened after the financial crash.
The Ifac report comes at an important time, as the Government is heading into preparations for the October budget. The council is already critical of the scale of spending growth which is planned and warns that there is little room for manoeuvre in the budget, given commitments already made and likely spending overruns.
But political pressures look set to lead the Government to push spending growth higher again in the budget, despite the Ifac warnings. And so the risks facing the public finances would increase yet further. Given the scale of pre-budget promises from various Ministers, this is the likely outcome.
