The Government’s budget strategy for next year is appropriate, according to the Irish Fiscal Advisory Council (IFAC), but it has intensified its warnings about the need to prepare for longer term – and largely inevitable – pressures on spending. The ageing population and the need to spend heavily on climate change are going to have a big impact on the public finances in the years ahead, while at the same time tax revenue from cars and polluting fuels will fall off sharply. Meanwhile, long-standing concerns about the risks to corporation tax remain.
Nudged over recent years by IFAC, the Government has moved the budget into surplus and is now setting aside significant sums in a National Reserve Fund, partly in recognition that the extraordinary surge in corporation tax could start to ease back.
The latest estimate from the council in a new Fiscal Assessment Report is that some ¤9 billion of the ¤21 billion plus likely to be collected from corporation tax this year could be classified as “unpredictable” revenue. Without this cash, the public finances would be in deficit. Ironically, it is quite possible that corporate tax revenues for this year could exceed even the upgraded estimates. But with tech sector profits under pressure and economic growth slowing, there is reason for caution in the years ahead.
The IFAC believes the Government has responded appropriately in framing its budget for next year, including plans for significant supports for households in response to the energy crisis. Many are temporary – though the Government may come under pressure to extend them.
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However, it has concerns about the long term and has said the Government now needs to plan more realistically for the financial pressures that are looming in the years ahead – and these are significant. The ageing of the population will lead to increased spending on pensions, healthcare and social supports. The cost of climate change to the exchequer will be significant across a number of headings. And, as the report points out, the Government has still to outline the full costs of the Sláintecare project. The recent decision to hold the pension age at 66 has a significant, longer term cost too, imposing a burden on taxpayers well into the future.
By restricting its budgetary forecasts to the next three years, the Government is avoiding having to deal with the implications of these longer term issues. Having been hit first by the Covid pandemic and then by the war in Ukraine and the cost-of-living crisis, this is perhaps understandable. But the IFAC is warning that by 2024/2025, additional revenues may be needed if the real level of spending on services is not to fall, or borrowing to rise again. The corporate tax surge has allowed Irish politics to avoid these issues. It will soon be time to face up to them.