Bumper taxes, less spending on income supports will reduce budget deficit, says Ifac

Stronger tax receipts combined with lower spending on wage supports will result in a smaller-than-expected Government budget deficit of €15.5 billion this year, the Irish Fiscal Advisory Council (Ifac) has said. The figure is significantly less than the €20.3 billion the Government is forecasting.

In a pre-budget statement, the council noted that income tax and VAT had recovered "very strongly" in recent months. Similarly the number of people claiming the pandemic unemployment payment (PUP) had fallen faster than the Department of Finance had anticipated, it said.

The latest exchequer returns for August show tax receipts were €2 billion, or 5.4 per cent, ahead of target for the first eight months of the year while the number of PUP recipients fell below the 150,000 mark for the first time in August.

"This is good for the short term, but we flag that, even with the lower deficits we project, debt ratios are still likely to remain at high levels as the Government plans large continued borrowing in the coming years," Ifac chief economist Eddie Casey said.

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In its latest assessment, the council is critical of the Government’s revised budgetary strategy outlined in its recent summer economic statement (SES), which envisages higher spending and bigger budget deficits out to 2025, facilitated by an additional €18.8 billion in borrowing.

It said the pace of permanent budgetary expansion set out in the SES is fast by historical standards.

‘Future crises’

“This leaves the public finances more exposed to shocks, particularly from unexpected shortfalls in growth,” the council said in its statement. “It also reduces the likelihood that the Government could respond to future crises by supporting the economy in the same way it did during the pandemic.”

On the €4.2 billion (5.5 per cent) spending increase envisaged in Budget 2022, it said this was “ at the limit of what might be considered prudent”.

While the increase was “modestly” above the underlying growth potential of the Irish economy, the council said it was “appropriate” for the economy and would aid recovery.

Ifac has long argued that Government spending should be in line with the long-run growth trajectory of the economy.

In its statement, it commended the Government for establishing new, more transparent estimates of its future spending plans in the SES. However, it said the Government’s strategy still lacked “key details”.

“There are still potentially very large unknowns about expenditure for the coming years, such as whether additional spending might be needed to achieve the Government’s climate- and health-related objectives, including for Sláintecare,” it said.

The council also cautioned there would be no room for additional budgetary commitments without offsetting tax or spending changes beyond existing commitments and “stand-still costs”.

“This reflected the fact that large permanent spending commitments made in Budget 2021 had already used up much of the space that a growing economy would sustainably generate, while still bringing the budget deficit down and reducing debt at a steady pace,” it said.