Ifac warns Government about cutting taxes while spending more

The Irish Fiscal Advisory Council (Ifac) has warned the Government that cutting taxes while increasing spending poses a significant risk to the public finances.

Council chairman Sebastian Barnes told the Oireachtas Committee on Budgetary Oversight that the Government needed to prioritise between its plans for significant expansions in public investment, fast increases in current spending and a desire to simultaneously cut taxes.

The Government’s proposed €4.7 billion budgetary package for next year - which the council says is at the limit of what is prudent - is split three ways between current and capital spending increases and tax cuts.

Choices

“By expanding all areas at once, the Government is effectively evading difficult choices and slowing the return of debt ratios to safer levels,” he said.

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“This reduces the scope to ensure that future downturns or crises could be cushioned by strong fiscal support in the same way as during the pandemic,” Mr Barnes said.

Ifac has been critical of the Government’s revised medium-term budgetary strategy, which envisages a series of bigger budget deficits out to 2025 to cater for additional spending on health and housing, funded by an extra €19 billion in borrowing.

The plan also includes approximately €2 billion in tax cuts. The Government’s original plan had been to move to a balanced budget - where spending and tax receipts are aligned - by 2025.

“A more prudent approach would be to limit current spending to a slower pace of increase or to avoid plans to reduce the tax base at the same time as a ramp-up in public investment spending is planned,” Mr Barnes said.

The planned increase in capital spending will see Ireland’s public investment climb to 6 per cent of national income, a level not seen since before the 2008 crash.

“There is a good case for higher spending in areas such as health, climate change, and housing, and interest rates are low,” Mr Barnes said.

“ Yet the speed and timing of the ramp-up as well as Ireland’s weak track record with public investment management means that capacity constraints might lead to higher costs,” he said.

Costs

Construction costs have soared in recent months and there is concern a massive public spend in the area could overheat the sector.

Mr Barnes said the Irish economy is recovering quickly from the pandemic as vaccinations progressed and as individuals adapt to new circumstances.

“Upside risks to official projections for the economy include the potential unwinding of large household savings and boost from the Government’s planned budgetary expansion,” he said.

“However, jobs are likely to recover more slowly than spending and the long-term scarring effects on activity from the pandemic are uncertain,” he said.