The Government is set to breach the National Spending Rule repeatedly, an Oireachtas committee has heard.
The rule, introduced in 2021, sets a 5 per cent limit for core spending increases net of new tax measures.
But the Government is set to breach the rule numerous times, with net spending set to increase more than 5 per cent this year and next year, Prof Michael McMahon, acting chairman of the Irish Fiscal Advisory Council, told the Committee on Budgetary Oversight on Wednesday.
Breaches will have added up to €8.5 billion (9.7 per cent) by 2024.
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“Given the position of the Irish economy, the council believes that current budgetary policy is not conducive to prudent economic and budgetary management,” McMahon said.
Speaking about its latest fiscal assessment report, McMahon said health spending overruns have not been reflected in budgetary updates. This was despite health spending being “well over budget early in the year”.
Overruns in spending are occurring earlier this year than in past years, and at a higher level, he said.
“These overruns are unsurprising. We estimated that an overrun of €1.6 billion looked likely for 2024. The latest fiscal monitor data means our estimated overrun for 2024 is now €90 million higher”.
The council said much of the spending labelled as outside of core spending in 2024 should be counted in core spending. “Not doing so flatters the breach of the spending rule,” he said.
This includes spending on health related to the pandemic, spending on humanitarian assistance for refugees and a new category of capital spending labelled windfall capital investment.
These three categories of spending add up to more than €4 billion this year.
“The council is not opposed to these items of spending. In fact, we welcome that these items of spending are included in projections out to 2027,” he said.
This was in contrast to Budget 2024, where much of this spending was assumed to fall to zero in 2025.
But it was the classification of this spending that the council found “problematic”, he said.
Separately, Government revenue is highly concentrated and could reverse suddenly, McMahon said. Corporation tax receipts are concentrated among a small number of large, foreign-owned multinationals. The council estimated that just 3 firms accounted for 43 per cent of corporation tax revenues in 2022.
Income tax is also highly concentrated, with a small proportion of highly paid employees paying much of Ireland’s income tax.
“Downturn in a small number of sectors would impact on income tax as well as corporation tax,” McMahon said. “While Government revenue is concentrated, this does not mean we think it is about to reverse. Rather, it is a risk and so a prudent approach is to not build permanent spending commitments off this revenue.”
Generally, the Irish economy was performing well and “operating at or above its potential”, he said.
The labour market remained tight, with record high employment and record low unemployment. While inflation is falling, this was mainly driven by falling energy prices.
Domestically generated inflation remained high at about 4.4 per cent. Given the strong economy, budgetary policy should not add to demand, he told the committee.
This was “not a time for the ‘everything now’ approach of cutting taxes and increasing current and capital spending all at once,” McMahon told the committee, and choices now “need to be made”.
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