LAST UPDATE | 6 Sep 2023

A LARGE PACKAGE in this year’s budget would be a mistake, according to a new report by the Fiscal Council.

The report, released today, outlined several recommendations from the independent body.

Chief among them is the insistence that the government follow the National Spending Rule, which they say will be breached every year to 2026 under the proposed plans.

The National Spending Rule was agreed in 2021, and seeks to keep increases to “core spending” – spending from the Exchequer – at 5% or lower. The rule has been breached in the previous two budgets.

The Council’s report says that the strength of the Irish economy means that further stimulation through a large budgetary package would have a destabilising effect.

The current approach continues “procyclical policies Ireland has struggled with in the past”, they said.

“That is, increasing spending and cutting taxes when the economy is already performing strongly.

“Such an approach can destabilise the economy in an upturn, fuelling more price increases. And it often means having to reverse those measures in bad times as revenues dry up. This approach has added to unemployment increases in downturns.”

A procyclical fiscal model means increasing spending and cutting taxes while the economy is expanding. This requires cutting spending and increasing taxes in periods of economic recession.

A particular concern is the continued reliance on corporation tax receipts. The receipts, said the Council, continue to “flatter the budget balance”, and if they were removed, Ireland would be posting a 17th year in deficit.

Other issues such as an ageing population and the impact of climate change are also of concern, and the Council says the government are not doing enough to address them.

Commenting on the report, Council Chairperson Michael McMahon said:

“There is merit for more investment in many areas and these can be addressed within the [spending] rule. Extra spending can still be achieved with offsetting tax increases or spending adjustments elsewhere.

“But hard choices need to be made. The Government needs to avoid adding to price pressures and break with its procyclical past.”

The large surpluses posted in the last few years have drawn calls for investment in areas such as housing to alleviate the ongoing crisis.

‘Things have changed’

Ministers are planning a 6.1% increase in core spending, and have justified the move in the context of continued high inflation levels.

Taoiseach Leo Varadkar today defended the Government’s approach to the budget following the critical assessment and rejected the assertion that ministers were set to repeat past mistakes.

“We’re not going to do that,” he told reporters as he arrived for a Cabinet meeting this afternoon in Co Wicklow.

He added: “IFAC is a really important body.

“I was a member of the government that established it back in 2011 or 2012 and respect that they have a job to do. I do respect their advice, but I don’t agree with it on this occasion.

“The 5% spending rule was a rule that was set by government. The thinking behind it at the time was 2% to cover inflation and then 3% to make things better, two plus three is five.

“But things have changed a lot since then. We now have inflation that’s much higher than that.”

Varadkar said that if government were to “stick to that 5% rule”, then it would not be able to “give pensioners and carers and people with disabilities the increase they need in the budget”.

“We wouldn’t be able to give our hard working public servants the kind of pay increase that they’re going to need,” said Varadkar, “we wouldn’t be able to keep up with the growing demand for health and education because of a rising population against the backdrop of inflation.

“So that’s why, as a Government, we don’t agree with them on this particular issue.”

Varadkar also made clear the Government would be adhering to EU fiscal rules on spending when setting the budget.

He said the 5% rule was the Government’s own rule and it was introduced at a time of low inflation and that the landscape has changed.

Varadkar added: “One thing we will definitely do in the budget, there will be a very substantial surplus and we will use that surplus to pay down the debt and also to set aside for future demands.

“So far from fuelling the economy and pouring money into the economy, we are actually going to take billions and billions out of the economy, use it to reduce debt and set it aside for the future and I think that’s the right thing to do.”

-With additional reporting from Press Association