The Government’s upcoming budgetary package has the potential to “destabilise the economy” and fuel further price increases, the State’s fiscal watchdog will warn on Wednesday.
In one of its sharpest critiques of Government policy to date, the Irish Fiscal Advisory Council (IFAC) will say the Coalition’s revised spending plans, outlined in its recent Summer Economic Statement (SES), would see the national spending rule “repeatedly breached” every year out to 2026.
“As a result, core net spending is expected to be €4 billion higher by 2026 compared to plans set out five months ago. The breaches are serious,” the council will tell the Oireachtas Committee on Budgetary Oversight on Wednesday, according to a copy of its statement seen by The Irish Times.
The council is the latest institution to sound the alarm over State spending plans and the Government’s decision to drop the 5 per cent spending rule, which seeks to keep spending within a sustainable limit.
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In its latest quarterly bulletin, published on Tuesday, the Central Bank of Ireland said the Government’s planned package for Budget 2024 risked keeping inflation higher for longer and was likely to “amplify demand in an economy already operating at capacity”.
In the SES, the Government signalled a budgetary package of €6.4 billion, comprising additional public spending measures of €5.2 billion and taxation changes costing an extra €1.1 billion. This was significantly more than what had been earmarked in previous statements. An additional €4 billion is also being earmarked for one-off cost-of-living measures.
In its statement, IFAC warns the Irish economy does not require extra stimulus. “We are above full employment – that is, we have never had this high a share of the population employed. This strength is one of the reasons why high prices and wage pressures at present could persist,” it says.
IFAC claims the Government’s budgetary plan would continue the procyclical fiscal policies which Ireland has struggled with in the past.
“That is, increasing spending and cutting taxes when the economy is already performing strongly. Such an approach can destabilise the economy in an upturn, fuelling more price increases.
“And it often means having to reverse those measures in bad times as revenues dry up. This approach has added to unemployment increases in downturns, exacerbating recessions,” the council says.
It also claims the breaches leave the fiscal framework and Ireland’s national spending rule less credible. “This comes at a time when EU fiscal rules are not applicable, and reforms will render them less useful for Ireland.
Members of the Economic and Social Research Institute (ESRI) and the Central Bank appeared before the committee on Tuesday.
Without criticising the Government’s budget plan directly, the ESRI’s Kieran McQuinn cautioned policymakers against stimulating the economy at a time of record low unemployment.
“Restraint is needed in other areas of fiscal policy in order to create the space for the investment that is necessary. In particular, taxation policy must be particularly prudent if this risk is to be avoided,” he said.
He also warned of “significant adverse side effects” from higher interest rates that have still to wash through the economy, with investment and economic growth expected to be negatively impacted.
The Central Bank’s director of economics and statistics Robert Kelly warned that an expansionary budget could set Ireland on a different inflationary path to the rest of the euro zone.
“I would be concerned about a potential detachment from the inflationary dynamics of Europe because if we become out of step we can’t respond as a central bank to tame demand,” he said.
