The Irish Fiscal Advisory Council expects the economy to ‘bounce back’ despite challenges
It says it is not providing realistic guidance to the public and is increasing the risks that things could go wrong.
However, when it comes to the prospects for the economy, the Fiscal Council is relatively upbeat and said it expects the economy to “bounce back” while it considers any risks as “broadly balanced”.
When it comes to the Government’s planning, IFAC is far from impressed and says the absence of realistic plans and targets leave the public finances “unanchored”.
It describes departmental spending limits as only there to comply with the law and says that little or no account has been made for how much key government commitments like Sláintecare and climate change will end up costing.
IFAC also claims that permanent increases of €5.4 billion in non-Covid spending this year have used up much of the available resources a recovering economy might generate.
It says major decisions on tax, welfare and pensions have been effectively postponed and the Government is not providing realistic guidance to the public and is increasing the risk that “things could go wrong”.
The Council was established in the wake of the financial crisis to monitor how the public finances are managed and it produces two major commentaries each year.
One is published after the Budget and one after the Government’s Stability Programme Update (SPU).
The Council believes that by 2025, the public finances will be in deficit to the tune of around €3 billion or 1.2% of GNI*, a measure of the economy which strips out some of the impact of multinationals.
This is more than the €800m or 0.3% forecast by the Department of Finance in the SPU.
The Council says it believes the Department’s forecasts are “poorly founded” and does not take into consideration Programme for Government commitments on indexing income tax.
It also says the impact of shifts in the population has been underestimated, adding that it thinks the possible hit from changes to corporation tax rules could be €3.5 billion and not €2 billion as the Government has estimated.
IFAC says that increased Government spending in the pandemic was the right thing to have done and may have halved the impact of Covid-19 on the economy last year.
It said it believes the continuation of some targeted supports will be necessary, but it no longer believes the Government needs to bring in a broad based stimulus plan.
However, it says the €5.4 billion increase in permanent, non-Covid, expenditure this year was “not prudent” and has used up most of the resources that might be generated by a recovering economy.
It says if any additional Government spending plans are to be introduced, they would have to be funded by raising taxes or reallocating existing spending.
Furthermore, it says the cost of delivering commitments like Sláintecare and the Climate Action Plan have not been fully costed.
Meanwhile, other commitments under the Programme for Government on income taxes and USC limit options to raise revenue.
It also says the Government has failed to deliver a credible medium term budgetary plan, which it describes as “essential and long overdue”.
The absence of a plan leaves the public finances “unanchored”, it adds.
It says that it has become clear in recent years “that departmental expenditure ceilings are set, not with a view to controlling spending with realistic ceilings, but merely to comply with legal requirements.”
Departmental limits do not take sufficient account of demographics, price and wage increases, it adds.
It says the result of this “piecemeal approach” is that “major decisions on tax, welfare and pensions have been effectively postponed”.
It recommends that the Government sets realistic debt and spending targets.
Any unexpected gains from corporate tax should be saved in the Rainy Day Fund to offset the future anticipated decline in this revenue, it also recommends.