Ireland ‘vulnerable to inevitable downturn’, says financial watchdog head

Tuesday’s budget leaves Ireland unnecessarily vulnerable to “the inevitable downturn”, the head of the Government’s financial watchdog has said.

Seamus Coffey, chairman of the Irish Fiscal Advisory Council, said that overall there is little indication the budget is Brexit-proof because as money is being spent as quickly as it is coming in.

Speaking on RTÉ’s Morning Ireland, he said “It is not quite back to the days of ‘if I have it, I spend it’, but spending growth at 6 per cent and spending receipts that are not generated by the domestic economy does leave the budgetary position overly vulnerable that if there is a downturn that’s when we want to be increasing spending, not now when the economy is growing quite rapidly.”

Mr Coffey pointed out Government spending is due to rise to €85 billion, up €4.2 billion for 2019 - an increase of 6 per cent - with some funded by tax increases, but the majority, he said, is coming from within the Government’s accounts.

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“A 6 per cent growth rate in spending is high relative to what we expect the potential or sustainable growth rate of the Irish economy. The budget documents themselves show some breaches of the expenditure rule, the benchmark built into our fiscal framework,” he added.

“Look at the overall impact of the budgetary decisions - we’re seeing decisions that are increasing spending quite rapidly in an economy that is growing itself, very strongly, one that faces risks on the horizon, so it’s not leaving us in a sufficiently strong position to deal with the inevitable downturn when it happens.”

Mr Coffey said there were no savings going into the “rainy day fund” announced by Minister for Finance Paschal Donohoe on Tuesday.

“Look at the overall Government accounts for 2019, they are close to balanced, the difference between spending and revenue for 2019 is minus €75 million, so spending a tiny bit more then revenue is the current plan; in general terms the Government budget is balanced, so there is no additional saving or surplus there to go into the rainy day fund.

“If we look at the source of some of the revenues that are funding these spending increases, by and large they’re coming from growth, but some are coming from corporation tax and from additional interest savings on the national debt as interest rates continue to remain very low.

Mr Coffey said there was an increase in spending “across a wide range of areas” including health, justice and education “that really should be funded from sustainable revenue sources, not the volatility of corporation tax and potentially interest rates - which means that cutbacks may be made in the future, right when we don’t need to do them”.

Mr Coffey added he hopes there will be no need for supplementary budget for health this year and “that the cycle of supplementary budgets for health, that has been going on now almost every year should be stopped in 2019”.

“Look at a broader impact of budgetary decisions, not only was €1billion given to [the] health sector on Tuesday, an extra €700 million was given to the sector the previous Friday for 2018. That spending was built into the base and will be repeated again in 2019. The €750 million and the €1 billion are additional - they’re cumulative so overall spending is about €1.75 billion higher for 2019 than would have been the case previously.

He said it was good to see the additional funding for health announced upfront, so there should be no need for a supplementary budget.

“If we take those increases in health spending from 2014 when employment in the broad health sector was about 100,000, next year it’s expected that employment in public health sector will be 120,000.

“That’s a 20,000 increase in employment in just four years in just one of the public sectors; that is at a time when the private sector itself is creating substantial employment, and there is the demand for labour.

"While we're not saying there shouldn't be that increase in employment in the health sector, there's no off-setting measures elsewhere to create space in the economy, to create the buffers to deal with something like Brexit. "