Four years after adopting and immediately abandoning a 5 per cent spending rule, the Government is back with a new commitment to keep annual expenditure increases – over the next five years – to an average of 6 per cent.
The move, contained in the Government’s Medium Term Fiscal and Structural Plan, launched jointly on Friday by finance Ministers Simon Harris and Jack Chambers, is an attempt to rein in runaway spending and put manners on a very messy annual budgeting process.
Budgets are drawn up and delivered every October only to be torpedoed by spending overruns and supplementary estimates the following year. The Irish Fiscal Advisory Council (Ifac) calls it “fiscal gimmickry”.
Spending for 2025 is already €4 billion beyond what was outlined in the budget last year.
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This annual budgetary fudge has seen spending accelerate in an entirely unsustainable fashion, over and above what inflation or the increase in population implies.
Between the years 2019 and 2024, total gross expenditure here rose from just over €67 billion to €104 billion, an increase of €36.7 billion or 54 per cent, equating to an average annual growth rate of 9.4 per cent, almost double what the previous Government signed up to in 2021 with its 5 per cent spending rule.
[ Harris promises ‘fundamental change’ in budgeting with new 6% spending ruleOpens in new window ]
This additional spending has been facilitated by windfall tax receipts from the multinational sector and much of it has now been built into the State’s expenditure base, potentially storing up trouble for the exchequer in the future.
Without the windfall element of these tax receipts, the Government’s budget surplus, expected to be over €9 billion this year, would morph into a budget deficit and we would be facing tough budgetary decisions particularly given the need to address the country’s infrastructural deficit.
Bringing the annual growth in spending down from 9.4 per cent to 6 per cent will be a stern test for Harris. He championed the costly reduction in VAT for hospitality against the wishes of the Department of Finance which viewed it as imprudent.
The Government’s plan still involves a significant pickup in spending out to 2030.
Could the decision to spend most of next year’s corporation tax come back to bite the Government?
It is forecast to rise from €110 billion this year to €147 billion in 2030, equating to a 24 per cent increase. And there’s a €1 billion contingency of unallocated money, giving the Coalition a little bit of wriggle room.
One of Ifac’s long-standing criticisms of Government has been the lack of a medium-term plan for spending. Up until now, the department has applied notional spending increases to future years which have borne little relation to reality.
The Government will claim that it has now acquiesced, but its hand was forced by the European Union’s new fiscal rules which require member states to provide “medium-term national fiscal-structural plans”.
Ireland won’t be in any way burdened by the EU’s financial rules which force member states to stay inside certain debt and deficit thresholds because of its inflated GDP (gross domestic product) numbers, which flatter Ireland’s financial position.
Instead we have a self-imposed 6 per cent spending commitment which Harris and Chambers have now staked their reputations on.
