Government spending will need to increase by about €265 billion over the next 25 years to pay for an ageing population, more housing and cutting emissions, Central Bank governor Gabriel Makhlouf has said, as he called for a credible spending rule to help prevent future downturns.
“While the State’s Future Ireland Fund (FIF) will go some way to paying for what is needed in the years ahead, “the FIF will be insufficient – on its own – to fund the higher level of public expenditure that will be required to meet the needs of an older population and to fund climate and housing investment,” Mr Makhlouf wrote in his pre-budget letter to Minister for Finance Paschal Donohoe, which was published on Monday.
Spending “will need to rise by 6.5 percentage points of national income (GNI*), or €265 billion, between 2025 and 2050 to fund higher age-related spending and the additional public investment required to meet housing and net zero targets,” he added in the letter, which is considered a key part of the budget planning process.
Amid what he described as “heightened uncertainty” around the global economy, Mr Makhlouf urged the Government to broaden the tax base, amid concerns about how reliant the exchequer is on a small number of companies and individuals to pay maintain its tax revenue.
Overseas multinationals generated about a fifth of all tax and PRSI in 2023, Mr Makhlouf said, while about 8.5 per cent of tax payers accounted for 56 per cent of personal income taxes paid.
Given that backdrop, the Government should install a “credible” spending rule in the upcoming budget.
“To avoid a repeat of past mistakes and to shift budgetary policy away from an excessive short-term approach, the Government should commit to a credible fiscal anchor for budgetary policy to ensure the overall fiscal stance is suitable, guards against procyclicality and boom-bust dynamics and safeguards long-run fiscal sustainability,” Mr Makhlouf wrote.
Successive governments have previously pledged to cap the increase in so-called core spending at 5 per cent per year. Yet in the years since that pledge was introduced, successive ministers have broken that rule.
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Mr Makhlouf has been critical of such moves in the past, noting it would likely boost inflation.
“It is important that policy supports rigorous expenditure control – not least of current expenditure – and enables the enforcement of sustainable increases in overall net government expenditure over time,” the governor added.
While he didn’t specify what that anchor should be, the Central Bank has previously suggested the anchor should links “growth in public expenditure to the underlying potential growth rate of the economy” net of tax changes.
On housing, the Mr Makhlouf noted that public money on its own “will not be sufficient to address the housing and wider infrastructure gaps that have emerged. Fiscal and broader public policy should more actively consider reforms to crowd-in private investment and to promote productivity growth.”
He pointed to measures that could quicken the planning process for housing, adding that such measures which would reduce the delays and costs were needed to help ensure the long term benefits of such projects feed into long-term growth.
Mr Makhlouf also pointed to the need for investment in new technologies in the construction sector to help boost large scale projects especially for housing and infrastructure.
