Temporary measures in budget no longer justified and risk stoking further inflation, says watchdog

The State’s budgetary watchdog has questioned the Government’s rationale in providing €2.7 billion in temporary measures to address cost-of-living increases when headline inflation was falling and the economy was still growing relatively strongly.

In a flash response to the budget, the Irish Fiscal Advisory Council (Ifac) claimed the one-off measures, which included three further €150 energy credits, ran the risk of fanning further inflation.

The council also repeated its criticism of the Government’s decision to abandon its own 5 per cent spending rule, claiming the Coalition’s spending plans would breach the spending rule every year out to 2026 and would undermine “the path for Ireland’s public finances”.

“Pre-budget, we said the Government should adjust its plans to stick to the national spending rule and there was little justification for further temporary measures, given falling prices, the strong economy, and the risks of fuelling more inflation,” it said.

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“Instead, the Government has gone further and it is unclear exactly how far. This is a serious cause for concern. It repeats past mistakes of procyclical fiscal policy; undermines the national spending rule; and makes Government plans less credible,” Ifac said.

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The watchdog said the larger permanent budget package was also likely to add to inflation, leaving it “higher for longer”, while noting the noncore measures will also lead to “more persistent rates of high inflation”.

The council welcomed the creation of a new sovereign wealth fund. “If used correctly, this could help address future ageing pressures, lessening the need to increase taxes on future taxpayers,” it said.

The Department of Finance’s economic and fiscal outlook report, published alongside the budget, said it expected reasonably “solid growth” of 2.2 per cent this year in terms of modified domestic demand (MDD), the department’s preferred measure of economic activity.

This was unchanged from previous forecasts and comes against “a background of moderating energy and consumer price inflation”, it said.

However, the department cut its growth projection for next year to 2.2 per cent, down from 2.5 per cent. “For next year, external demand is set to remain subdued, with the more restrictive macroeconomic policy stance a powerful headwind for the euro area, UK and US economies,” it said.

Growth as measured by the more traditional GDP yardstick is expected to be just 2 per cent this year, down from more than 9 per cent last year on the back of a fall-off in pharma exports.

Department officials warned economic growth here faced three headwinds in the form of a slowdown in demand in export countries, the persistence of elevated inflation, and higher interest rates.

While headline inflation is expected to fall below 3 per cent next year, core inflation, which strips out volatile energy and food prices, is expected to remain elevated at 3.4 per cent, it said.

A “more general mismatch between demand and supply had triggered higher rates of core inflation, which has proven to be somewhat persistent”, the department said.

It projected a general Government surplus of €8.8 billion this year. Excluding the impact of windfall corporate tax receipts – estimated at €10.8 billion this year, the underlying fiscal position (otherwise known as the general government balance) would be “somewhat less benign”, equating to a €2 billion deficit.