Warning over tax hikes to help cover Government spend

Four weeks from Budget day, the Irish Fiscal Advisory Council (Ifac) said the Government has left itself little room for manoeuvre and has avoided making “hard choices”.

Hiking spending and lowering taxes while the economy is growing is a “risky” strategy that could lead to price rises or abandoned reform pledges.

“At the moment, the Government plans to increase current spending, ramp up investment and introduce tax cuts all at the same time,” said Sebastian Barnes, Ifac’s chair.

“This avoids hard choices between different priorities. And that’s a lot to be asking of the public finances at the same time.”

Mr Barnes advised the Government to stop “trying to do everything at the same time”.

“There is a concern that reducing taxes, at a time when the Government is planning to spend a lot more money, might seem like a slightly odd mix,” he said. “So maybe a bit more consideration should be given to raising taxes to pay for higher investment or higher current spending. But that’s not a recommendation.”

On a positive note, the watchdog says: “The economy is recovering swiftly as vaccinations progress. An unwinding in huge savings accumulated by Irish households should mean a faster bounce-back in the economy.

“This could help to limit long-term losses following the pandemic.”

However, Ifac believes the Government has enacted a “major shift in policy” by running deficits out to 2025 instead of balancing the budget, as promised in the Programme for Government.

In the summer economic statement in July, Finance Minister Paschal Donohoe said he would let spending overshoot revenue in order to pay for extra pandemic supports and improve public services. It amounts to an investment of almost €50bn in infrastructure over four years.

But in its pre-budget submission, released today, the Fiscal Council criticised up to €8bn in extra spending this year that it said went beyond pandemic supports and was “not prudent”.

It also said a commitment to raise permanent spending by €4.2bn in Budget 2022 – a 5.5pc increase – while cutting taxes by €500m was “at the limit of what is prudent”.

There is a 25pc risk that being too generous now could force the Government to row back on health, housing or climate pledges later, Ifac said, pointing to “very large unknowns” about future spending, particularly on Sláintecare.

It also said there was “very little detail on the economic aspects” of the recent Housing for All plan. Ramping up construction too quickly could put pressure on supplies and nudge prices upwards in the sector, Mr Barnes said.

“This needs to be monitored very carefully and may act as a kind of speed limit on the ability to ramp up investment.”

Increasingly volatile corporate tax revenues are also a concern, especially as a global tax deal due to be signed next month could lead to losses of €2bn a year or more by 2025.

On the upside, better-than-expected growth and a higher tax take means the budget deficit will be around €4.5bn less than forecast this year, coming in at €15.5bn.

Still, Ifac forecasts put Ireland’s public debt levels among the highest in the EU by 2025.

“Given these risks, the Government will need to stick to these plans, at a minimum, with any additional spending beyond the [summer economic statement] plans met through higher taxation,” the Ifac submission states.

“A more prudent approach would be to limit current spending to a slower pace of increase, or to avoid plans to reduce the tax base at the same time as a ramp-up in public investment spending is planned.”