The economy is ready to bounce back quickly from Covid-19 but the Government’s medium-term budgetary forecasts are poorly founded and not fit to meet the fiscal challenges of the next few years, according to the State’s budget watchdog.
he Irish Fiscal Advisory Council, an independent body that assesses the country’s taxes and spending, predicts strong growth will return as restrictions ease and vaccines are rolled out. In fact, the council even sees potential for a surprise on the upside for the economy.
However, the council is sounding the alarm regarding the Government’s major ongoing spending commitments following two years of large emergency deficits to cope with the pandemic.
In a report published today, it lacerates the Government’s budget planning as “unanchored” and lacking in credibility, with major policy promises on healthcare, climate change and pension provision simply not built in.
Perhaps more concerning, the council believes the Government’s medium-term forecasts are far too dependent on continued low interest rates, buoyant corporation taxes and increases in income tax revenue that are unlikely to materialise.
“The lack of strategy is a long-running issue and almost a structural problem at this point,” said chief economist Eddie Casey.
“There is a strong parallel to pre-financial crisis behaviour when the government made spending commitments on the expectation that future tax receipts would pay for it. When it suddenly dries up, you’re in a terrible situation.”
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While the council is not expecting a return to austerity as a result, it is warning that deficits could grow rather than shrink in the years ahead, meaning that policy commitments in the Programme for Government, such as Sláintecare, could be cancelled to balance the books.
One of it’s chief fears is that the Government has become too reliant on corporate tax windfalls, which it regards as unreliable and unsustainable.
Corporate taxes now account for €1 in every €5 the Revenue collects in taxes each year. Moreover, those taxes are highly concentrated among just a handful of major multinational companies.
While this revenue stream has supported unexpected expenditure during the Covid crisis, the council maintains that the receipts are at an unsustainable level and vulnerable to sudden falls.
Yet it concedes that if everything goes right for the Irish economy, the budget will balance by 2025, even though total Covid spending will exceed €26bn by the end of the year, pushing the deficit above 8pc and adding significantly to the country’s debt load.
The council expects fiscal supports will still be needed through 2022, exhausting the extra contingency money set aside by Finance Minister Paschal Donohue. However, the council said that only modest adjustments in taxes and spending will be required to get the budget back on track.
“There is a possibility that growth pays for spending,” said Mr Casey.
“We’re fairly confident that growth will be better than the Government projects.”
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