Breach of National Spending Rule
The Ifac report points out that the government has been breaching its National Spending Rule, which was introduced in 2021. This rule caps annual spending increases at 5%, net of any tax raises. However, the government has exceeded this limit every year since its introduction. As a result, recent research suggests that these breaches could lead to a 1.9% rise in consumer prices next year, effectively canceling out any benefits households might receive from government measures, such as electricity credits.
According to Seamus Coffey, chair of Ifac, this pattern of overspending is putting unnecessary pressure on an already overheated economy. “The Government continues to make big promises. This is driving up prices and making it harder for people to afford the basics,” Coffey stated. He emphasized the need for the government to learn from past mistakes and stick to its own rules now to avoid drastic measures, such as cutbacks, in future economic downturns.
Economic Risks from Overspending
Ifac highlighted that the current budget surplus is primarily due to windfall corporation taxes, and without these, the budget would be in deficit. The watchdog warns that if these corporation taxes decline suddenly, the government may have to backtrack on its spending promises, creating further economic instability. The budget, scheduled for release on October 1, is expected to include a cost-of-living package, with Taoiseach Simon Harris promising households will feel the benefits before Christmas. The package is likely to feature measures like doubling child benefits and one-off increases in disability, working family, and carer payments.
However, Ifac argues that these types of measures, while well-intentioned, will likely add more fuel to inflationary pressures. “With inflation having settled, and prices now appearing to be permanently higher, the Government needs to move away from temporary measures,” Ifac states. The watchdog criticized that less than one-third of the measures introduced in the last two budgets were targeted, despite being intended as temporary, targeted responses to economic challenges.
Ongoing Inflation and Spending Overruns
Inflation in Ireland has risen more sharply than anticipated following global events like Russia’s invasion of Ukraine, with prices increasing faster than expected across various sectors. While inflation was initially predicted to average around 2% annually, the actual rate is now expected to be closer to 4.5% from 2022 to 2025. Ifac points out that this ongoing rise in domestic prices is evident in sectors such as restaurants, cafes, rent, and medical services, all of which continue to see rapid price increases.
The watchdog also notes that government spending continues to exceed forecasts, with spending expected to be €12 billion above the rule’s limit by 2025, even after accounting for tax measures. This figure would still be €3 billion higher if the government had fully accounted for inflation. Higher spending has been partially justified by Public Expenditure Minister Paschal Donohoe due to Ireland’s rapidly growing population and the need for expanded services. However, Ifac questions the sustainability of this approach, suggesting it remains uncertain how much of the recent population increase will be permanent.
Reliance on Corporation Tax and Potential Financial Risks
Ifac raises concerns that government spending forecasts are “unrealistic,” citing significant overruns in key areas such as health, education, and children’s services. For example, the health sector alone is expected to exceed its budget by up to €2.5 billion this year, despite government estimates over the summer indicating an overrun of €1.5 billion. The watchdog warns that while these spending overruns are currently being covered by windfall corporation tax receipts, this is not a sustainable long-term solution.
A significant portion of Ireland’s corporation tax receipts comes from a small number of foreign multinationals, such as Apple, Microsoft, and Google, which accounted for 43% of all corporation tax receipts in 2022. The government estimates that €11.5 billion of the corporation tax expected next year will be “windfall” in nature, with €6 billion being set aside for long-term investment funds. However, the remaining €5.5 billion is being funneled back into the economy, even as Ireland experiences record employment rates.
Ifac cautions that this reliance on windfall corporation taxes and continued high spending could lead to significant financial trouble if there were a sudden drop in these revenues. The report states, “Ireland relies on these sectors heavily for both corporation tax receipts and high-income, high-tax jobs,” adding that a simultaneous drop in corporation and income taxes could severely impact national finances.
Conclusion
The Ifac report serves as a warning to the government to adopt more prudent fiscal policies and adhere to its own spending rules to avoid further economic challenges. With the upcoming budget on the horizon, the government faces a critical decision on whether to continue its current spending patterns or take steps to ensure long-term financial stability.
