Tomorrow’s budget is important for a number of reasons. There will be much focus on its political implications for the Coalition and its likely impact on the economy.
However, another key issue is also worthy of attention. It is the need to produce a package which is credible, in the sense that the forecasts, for spending in particular, are firmly based. This has not been the case in recent years as spending has repeatedly come in well ahead of target.
There are times when this is understandable – perhaps even inevitable. Following Russia’s full scale invasion of Ukraine in 2022, for example, the resulting surge in inflation required a response to protect households and businesses . In a turbulent world, things happen, some requiring a budgetary response.
Looking at Ireland’s recent budgets, however, it is clear that other factors are also at work. The Irish Fiscal Advisory Council has pointed to two trends. One is unrealistic budgeting which fails to properly provide for the year ahead, particularly in the light of a rising population There appears an understanding in the background that this can be dealt with via supplementary estimates as required.
RM Block
The other related issue is poor budget control. Departments often work with poor information systems. In some cases there seems little commitment to stick to the budgeted figures. In terms of major capital projects like the National Children’s Hospital big overruns are the norm. But the key issue relates not to investment but to current spending on public services.
Minister for Public Expenditure Jack Chambers is seeking to bring this under better control and the Government has signed up to a 6 per cent target for spending growth in 2027. This may be adhered to in the budget sums. But whether it can hold in practice is the real question. Already it appears that spending this year is forecast to run €1.5 billion ahead of target and this may well be exceeded by the end of the year. If a realistic starting point for 2027 is not written into the budget, then failure becomes inevitable.
Over recent years soaring corporate tax has given successive governments budgetary room for manoeuvre and paid for significant overruns. The key goal for next year must be to remove unplanned overspending which emerges without any Govenrment sign-off. In turn this leaves more scope to make decisions to adjust if conditions really do demand it. A proper contingency provision could provide scope to pay for this.
As the Economic and Social Research Institute has pointed out, the mood in borrowing markets is changing. Any wobble in Ireland’s tax take could quickly lead international investors to examine the vulnerability of Ireland to potentially volatile corporate taxes. Building credibility is vital in uncertain times.
