Ireland needs new rules to control budget policy. This was the case made by the new chair of the Fiscal Advisory Council (IFAC), Séamus Coffey, at the Oireachtas Committee on Budgetary Oversight on Wednesday. And he is correct. The current rules – limiting spending growth to 5 per cent each year – have been largely ignored since they were introduced in 2021. New constraints are needed. And they need to be taken seriously.
This will not be a popular measure politically, particularly heading towards a general election. The main parties will all give a nod towards fiscal prudence, but are they really committed? There is a risk of a free-for-all of promises during the campaign, storing up trouble for the future.
The Government has moved the budget into surplus and established two new funds into which substantial amounts of cash are being paid – more than ¤10 billion by the end of the year. This is welcome and payments to these funds are now underpinned by legislation. The first requirement of a future budget plan is to maintain this commitment, bearing in mind that the rules do allow money to be released to support investment if economic growth slows markedly.
As the council says, this needs to be added to by some limit on government spending growth, particularly as the new EU fiscal rules look unlikely to provide any constraint on Ireland, because of the way they are drawn up. It remains to be seen how proposed spending limits under these guidelines will operate in practice.
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So the State needs its own domestic rules. Constructing these is not easy. The Government points out, with some justification, that it had to respond to the surge in inflation in 2022 by increasing spending. And a recent report from the Economic and Social Research Institute found some rationale for higher spending levels due to the increasing population.
But Ireland’s reliance on a small number of large multinationals for a significant amount of tax revenue remains a big risk. So far corporation tax has been the gift that keeps on giving, allowing the Irish political system to avoid difficult trade-offs in spending and tax. Relying on this continuing indefinitely would be risky. And a worrying trend in recent years is that spending each year has run well ahead of budget
IFAC points to budget rules which apply in countries such as the Netherlands and Finland, generally with cross-party support. The notable thing in these countries is wider public support for fiscal prudence. Despite the boom to bust cycle s of the past, it is not clear that this exists in Ireland. Or perhaps the public assumes appropriate controls are already in place. Either way, getting political consensus on this issue does not look easy. On the contrary, the election may turn into an auction of promised tax cuts and spending increases in a bid to win the favour of voters.