One theme runs through the latest report on the public finances from the Irish Fiscal Advisory Council (IFAC): the need for the Government to make ever-more-difficult choices. Against a backdrop of major uncertainty this is far from easy – IFAC itself notes that the gap between potential outcomes for the public finances is now " unusually wide”. This relates partly, though not entirely, to the unpredictable course of the war in Ukraine and to the knock-on impacts of inflation.
As the Government starts to consider more measures to ease the soaring cost of living, and enters discussions on public sector pay, the IFAC report points to the trade-offs that lie ahead. There is some scope for additional measures this year, but the report underlines the decisions in prospect thereafter – the Government will have to choose between measures to offset inflation, new spending measures and additional investment.
Inflation brings a new dynamic to the picture. Spending would have to increase to maintain current service levels and the real value of entitlements. Balancing this against the desire for new spending will not be easy. IFAC suggests that the Government go some of the way towards compensating people for inflation, but cautions that fully hiking pay, welfare and existing spending could fuel inflation. Partially compensating people for inflation while leaving some room for new spending programmes could be a better route, it says.
The report underlines the organisation’s repeated warnings about the challenges facing public spending in the medium term. The State has still to outline the costs of Sláintecare and the climate change transition. These will involve higher spending and thus new revenues to fund them. The decision on the State pension retirement age is also now overdue.
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There are other concerns. The extraordinary rise in corporation taxes has boosted tax revenues significantly, but may at some stage tail off. A significant portion of annual revenues in this area are not explained by economic activity in Ireland – 40-60 per cent of annual revenue on IFAC estimates – and thus may be judged to be vulnerable. Sensibly IFAC calls for excess revenues from this source to be more clearly identified and set aside in contingency funding. The Government also needs a strategy to replace vulnerable revenue in this area in the years ahead, it warns, a point which the Commission on Tax and Welfare is likely to consider.
This is another uncertainty to add to the list for Budget 2023. The Government is already looking at a range of measures to help households and will come under relentless political pressure. The bottom line from the IFAC report is that it is best to keep supports as targeted as possible. Trade-offs lie ahead between spending and revenue, requiring careful and strategic choices.