Ticked off about Government’s back-of-the-envelope budgets

It's now almost a choreographed event: a stinging attack on the Government's budgetary forecasts by the Irish Fiscal Advisory Council (Ifac), and the Government's shoulder-shrugging silence on the matter.

The council’s perennial bugbear is not that the Government’s annual budget is faulty or fanciful, but that financial forecasts for the two to three years after the budget – the medium term – are at best back-of-the-envelope stuff and keep falling way short of the actual spend. In other words, our budgetary processes, like so many other elements of policy, are undermined by short-termism.

The critique is best illustrated through the Government’s health budget. This has been rising at an average rate of 7 per cent since 2015. But the Government’s current multi-year forecasts for health assume only minimal increases for the years ahead – just €200 million or 1 per cent rises are factored in for 2022 and 2023. In Ifac’s eyes, this is entirely unrealistic. In its latest assessment, it also makes the point that policy commitments contained in the Coalition’s Programme for Government are also left out of these multi-year forecasts.

Sláintecare

The cost of implementing Sláintecare’s health reforms – estimated at €1.2 billion in 2021 – was only disclosed in May, seven months after the budget, while estimates beyond 2021 have not been provided.

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Rate increases in the cost of State pensions – the average benefit pensioners get – are also never included in these estimates; neither are the annual Christmas bonus payment to welfare recipients.

The days of being rescued by corporation tax may be coming to an end on foot of global tax reforms

And so the Government keeps bursting through these flimsy spending targets, making the setting of them almost meaningless.

“The official budgetary forecasts are poorly founded, major policy commitments are not built in, and the promised medium-term strategy has not been delivered by the Government,” Ifac says.

It also claims that the Government’s recent Stability Programme Update (SPU), which sets out its financial forecasts for the years ahead, is based on technical assumptions that do not reflect the full cost of providing core spending commitments.

“They also show income tax receipts growing unrealistically fast relative to incomes,” it says. This is not consistent with the Programme for Government plans to index the tax system, which would reduce growth in income tax receipts, the council says.

Spending increases

Budget 2021 also includes “substantial and permanent” increases in spending amounting to at least €5.4 billion without long-term funding, almost €8 billion if you include non-exchequer spending.

For the past number of years, the Government has been able to paper over the cracks in its spending plans thanks to bumper corporation tax receipts and interest cost savings on the national debt.

Business tax receipts have nearly tripled to €12 billion since 2014 and now account for €1 of every €5 collected in tax. The windfall, linked to the onshoring of assets here and increased corporate profitability generally, has allowed the Government drive a veritable coach and horses through its own budgetary forecasts, pulling last-minute budget-day rabbits out of hats.

But the days of being rescued by corporation tax may be coming to an end on foot of global tax reforms, which promise to trigger a major decline in receipts.

While the Government has factored in a €2 billion decline in receipts by 2025, Ifac warns the changes being considered could have a bigger impact. A scenario considered in its latest report shows how just five firms exiting Ireland could result in €3 billion of lost receipts.

Because corporation tax is so concentrated around a handful of firms – 56 per cent of the receipts come from just 10 firms – it is extremely volatile and therefore not a good or safe foundation for funding the health service.

From the council’s perspective, this over-reliance on potentially volatile tax receipts is not a credible or sensible way to manage the public finances, or to set your future spending plans around.

Now we're back into a period of running deficits, with a potential fall-off in business tax receipts on the way

While Fine Gael traditionally likes to present itself as the party of financial discipline, in reality it has struggled to rein in spending. Even on a project-by-project basis, the national children's hospital and the National Broadband Plan suggest cost containment has become a real problem.

Tailwinds

Despite the favourable tailwinds behind the economy in recent years – that is before Covid-19 – the Government really only managed to run budget surpluses on the back of surging corporation tax receipts. And these stronger-than-expected receipts have been quickly swallowed up by faster-than-planned increases in annual spending.

Now we’re back into a period of running deficits, with a potential fall-off in business tax receipts on the way. And so squaring the budgetary circle is going to get more and more difficult.

There’s always going to be reasons for breaching spending targets, but they should form some sort of anchor, some sort of guide, according to Ifac.

The Government typically responds to criticisms of its spending breaches by saying it can’t turn a blind eye to pressing needs in housing and health and that is it attempting to address these issues while maintaining fiscal probity – undoubtedly no easy task.

The council is, however, less concerned with whether the Government’s budgetary stance is expansionary or contractionary – more that it is transparent.