Séamus Coffey, the new chair of the Fiscal Advisory Council (IFAC), made a compelling case at the recent Oireachtas Committee on Budgetary Oversight on Wednesday. He argued for new budgetary control measures in Ireland. The existing regulations, which restrict annual expenditure growth to 5%, have largely been disregarded since their inception in 2021. Evidently, fresh and serious restrictions are in order.
However, these measures are unlikely to gain political traction, especially with the approaching general election in sight. As much as the main political entities express their commitment to fiscal responsibility, the reality of their commitment remains doubtful. There is a potential risk of faux pledges throughout the campaign, which could cause future complications.
This year, the government has substantially increased fiscal surplus and instituted two new funds to accumulate significant cash inflows – exceeding €10 billion by year-end. A positive development, payments into these funds are now underpinned by legislation. For future budget plans, this commitment needs to be sustained. This flexibility allows for funds to be allocated for investments if there is a significant economic downturn.
As IFAC stated, such efforts should be complemented by curbs on government expenditure growth. The upcoming EU fiscal regulations, due to the specifics of their formation, seem unlikely to impose any restrictions on Ireland. It’s still uncertain how these proposed spending limits will function in a real-world context.
Consequently, the nation must devise its domestic budgetary guidelines. The design of such rules is complex. The government reasonably argues its need to increase spending in response to the 2022 inflation surge. A recent study by the Economic and Social Research Institute also justified the elevated spending levels, attributing it to the growing population.
The dependency of Ireland on a handful of enormous multinational corporations for a substantial portion of its tax income poses a significant risk. So far, the continual supply of corporation tax has been a boon, permitting the Irish political sphere to evade challenging compromises in tax and expenditure. To presume that this pattern will persist indefinitely would be a gamble. Additionally, an alarming pattern in recent years is that annual expenditure has consistently surpassed the budget’s allotment.
IFAC cites budget regulations in nations like The Netherlands and Finland. These rules typically garner cross-party support and there is broad public backing for financial prudence. Despite previous boom-to-bust cycles, it’s unclear whether this sentiment holds in Ireland. Alternatively, the public may believe proper monetary controls are already operational. Nevertheless, reaching political agreement on this matter is no straightforward task. Quite the opposite; the imminent election might devolve into contests of promised tax reductions and spending escalations to curry favour with voters.