Budget plans break fiscal rules, warns watchdog

The State’s budgetary watchdog has again warned the Government

its plans for spending increases and tax cuts in the budget run counter to the “letter and spirit” of EU fiscal rules.

Prof John McHale of the Irish Fiscal Advisory Council (IFAC) said Government plans for an expansionary budget of between €1.2 billion and €1.5 billion were based on a 0.3 per cent reduction in the State's structural deficit.

This would represent a “significant deviation” from current EU rules, he said, which require a 0.6 per cent improvement in the deficit next year.

Prof McHale was speaking at the ESRI’s annual Budget Perspectives conference in Dublin.

“Based on its own projections the Government is pursuing a policy that is not in compliance with the rules, which are also enshrined in domestic legislation.”

Prof McHale said it was a worrying sign that the Government had begun deviating from the budgetary framework “so soon after the crisis”.

In a separate address, chief economist with the Institute of International and European Affairs Dan O’Brien set out the short-term risks, upside and downside, to recovery.

Labour market

On the upside, he said

Ireland

had had a “wage growthless recovery” so far underscored by sluggish consumption rates. However, a recent tightening of the labour market was likely to translate into pressure on wages, which should lead to a pick-up in consumption from here on in.

On the downside the biggest risk to recovery was a fragmentation of the political system after the next election, potentially delivering a weak government with a small majority.

A separate study presented by ESRI economists indicated six out of 10 jobseekers would see their incomes at least double by taking up a job.

The Making Work Pay More: Recent Incentives study appeared to debunk the theory that many jobseekers in Ireland were better off staying out of the work because of relatively generous welfare rates.

However, the study did note the risk of facing weak financial incentives to work was higher for unemployed persons with a spouse and children as these jobseekers tended to have higher welfare payments. However, in a small numbers of cases, particularly where families made greater use of medical cards, welfare traps were apparent.

Another paper entitled Exploring Tax and Welfare Options laid out the impacts on various income groups of cutting the top rates of universal social charge and income tax in the next budget. It suggested top earners had most to gain with low and middle income earners benefitting least.