“Budget 2027 puts the public finances on a worse trajectory by repeatedly breaking established spending limits and increasingly relying on high-risk corporation tax.”
That’s the initial assessment of the Irish Fiscal Advisory Council (IFAC) of Tuesday’s budget.
The Council is an independent statutory body created in the wake of the 2008 financial crash to act as Ireland’s budgetary watchdog. It is responsible for providing an honest and independent assessment of how the government in managing the public finances and the economy.
The Council’s criticism of Budget 2027 centres around three separate concerns: spending, a risky tax base and not enough saving.
The growth in the level of spending, net of tax measures, is much too high the Council said. In 2021 a limit of 5% annual increases was set, but since then the growth in budget expenditure has been around 10% per year – double the limit. While governments since 2021 have budgeted for around a 6% increase in spending, overruns have pushed that level higher every year since.
The Council warned that using high-risk corporate tax receipts to fund permanent tax and spending measures puts future budget stability at risk. The Council notes that much of the corporate tax Ireland receives can be viewed as excess tax, as it cannot be explained by activity within the country’s economy.
There is also very high concentration risk in a lot of Ireland’s tax receipts. Just three firms pay nearly half of all corporate tax, and the top 20% of individual earners pay three-quarters of income tax. This concentration risk suggests that there could be rapid changes to the amount of money available for spending, depending on how the economy develops.
Before the 2008 financial crisis, Government spending became reliant on tax receipts from the construction sector. That tax income very quickly dried up in the crash, leaving a succession of budgets where there were huge cuts in spending and a massive jump in Ireland’s borrowing needs, a situation that led to country needing an international bailout.
The third criticism centres around the lack of saving. The Council said that six out of seven euros of corporate tax is being spent rather than saved. Increasing the level of saving of these receipts would lead to a more secure tax base. It would also ensure there is money aside for future known costs, such as those caused by an ageing population, as well as having something to ease the effects of the next inevitable economic downturn.
Strong economy
In its commentary, the Council also notes that the Irish economy “continues to perform remarkably well”. A record number of people of prime working age have jobs, wages have risen faster than inflation over the last number of years, and economic growth is very strong.
The Council said that when the economy is doing well the Government should show restraint and “hold fire” until the next downturn. But the current budget is attempting to raise spending in many areas, reduce taxes, tackle cost-of-living challenges, and address infrastructure gaps all at once, rather than choosing between them.
With record numbers already in work, the Council said the ambition to do more in many areas risks pushing up costs rather than delivering more services or infrastructure.
Concluding its assessment of the budget, the Council said: “the Government should be saving more, making its tax base more secure, and avoiding aimless drift.
“It should stick to some rule on how fast it cuts taxes and increases spending. This would help ensure it can support people’s jobs in the next recession and avoid a disastrous repeat of the cutbacks in areas like housing that happened after the last crisis.”
While Ireland is certainly not back in the pre-financial crisis era of budgetary overspend, the Fiscal Council’s warnings should be heeded. With so much of the country’s tax receipts reliant on so few tax payers, both at the corporate and individual level, State finances are very exposed to changes in the global economy.
Numerous reports have pointed to increased costs Ireland will face from its ageing population. The Government is putting some money aside for future budgets, but the more that is saved now, the easier it will be to pay for those increased costs in future.
For politicians, the concerns are generally more short-term. Costs are rising for their constituents, and they want to be able to help by increasing Government spending.
That help can come with a sting in the tail. If the economy is close to capacity, as the employment figures suggest, then extra spending might only lead to further increases in costs, rather than adding to economic growth.
To put it another way, the increase in Government spending during a period of rising inflation could actually make the problem worse.
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