Ireland is unlikely to face any big scrutiny of its financial position or be constrained from spending under the EU’s new fiscal rules because of the inflated nature of its GDP (gross domestic product) figures, the Irish Fiscal Advisory Council (Ifac) will tell the Oireachtas Finance Committee on Wednesday.
In its opening submission to the committee, seen by The Irish Times, the budgetary watchdog notes that “given the use of GDP, Ireland will most likely be classified as a low-debt country”. Compliance with the deficit rules will also continue to be helped by “surges in corporation tax receipts”, it says.
The EU’s debt and deficit rules were suspended during Covid-19. However, a revamped version, allowing governments greater leeway to invest while attempting to rein in fiscal recklessness, is now being proposed by the commission. Members of Ifac are due before the finance committee to discuss the proposals.
“Ireland will most likely not face intensive scrutiny under the new framework,” the council will tell the committee. “Indeed, Ireland’s unusual circumstances mean that historically it has been compliant with the EU rules [outside of the banking crisis], but largely as these rules have been insufficiently demanding,” it says.
Ireland’s debt ratio was 45 per cent of GDP at the end of last year well inside the EU’s 60 per cent threshold. However, on a more appropriate GNI* (gross national income) basis Ireland would have a debt ratio around 83 per cent, Ifac says. Under the commission’s one-size-fits-all approach only GDP measures are considered.
Ifac believes Ireland will largely be left to its own devices under the new framework and that domestic spending rules, including the Government’s recently adopted 5 per cent spending rule, will need to play a more important role.
“The domestic Irish framework will, therefore, need to play a critical role to ensure the economy and the public finances are kept on a stable path. In short, the domestic framework should be the first line of defence, with the EU rules providing a backup. This should help to ensure that Ireland has fiscal rules that work,” the watchdog said.
“Overall, the main gain to Ireland from these reforms should be in making the euro area more stable and reducing debt in other countries with riskier levels of debt,” it says.
The Department of Finance is expected to publish proposals for a National Reserve Fund aimed at dealing with windfall corporation tax receipts, which are expected to amount to €24 billion this year. With some €65 billion in budget surpluses expected in the years up to 2026, Minister for Finance Michael McGrath brought a paper to Cabinet this week outlining “proposed next steps in future-proofing the public finances”.
“Given the huge inflows of corporation tax from a small number of foreign multinationals and Ireland’s now historically low unemployment rates, saving a large part of corporation tax receipts is necessary to avoid overheating the economy,” Ifac says in its opening submission. “The National Reserve Fund should be made into a Pension Reserve Fund that would save incoming revenues while helping to put the pension system on a sustainable footing.”
