An Oireachtas committee has been informed that the Government is expected to persistently infringe the National Spending Rule. This regulation, established in 2021, restricts the increase in core spending, minus new tax policies, to a maximum of 5 per cent. Professor Michael McMahon, the interim chairman of the Irish Fiscal Advisory Council, revealed to the Budgetary Oversight Committee on Wednesday, that the Government is anticipated to break this rule multiple times. He forecasted that net expenditure will rise above the 5 per cent limit both this year and the next, eventually accruing breaches totalling €8.5 billion (9.7 per cent) by 2024.
Reviewing the council’s recent fiscal assessment report, McMahon commented on the discretions not evident in budgetary updates, despite health expenditure significantly exceeding the budget early in the year. He pointed out that these overruns are happening at a greater magnitude and earlier than the previous years. He highlighted that their initial prediction of an overrun of €1.6 billion for 2024 has been updated to an additional €90 million, owing to the latest fiscal monitor data.
McMahon criticized the categorization of expenditures in 2024, suggesting that several spends labelled as non-core spending should be included as core expenditures. The omission of these, which encompass pandemic-related health costs, refugee humanitarian aid, and a new segment of capital investment called windfall capital investment, artificially minimises the violation of the spending rule, McMahon argued. The total of these three categories surpasses €4 billion this year.
While disapproving the categorisation, McMahon clarified that the council is not against these spending items. He added that they applaud the inclusion of these expenses in forecasts up to 2027, a contrast to the 2024 budget assumption that these costs would diminish to zero in 2025.
McMahon warned that the concentration of Government revenue is very high and could potentially alter suddenly. A small number of large multinationals, predominantly foreign-owned, are accountable for corporation tax income. The council put forth an estimation that in 2022, just three firms were responsible for 43% of corporation tax proceeds.
Income tax, much like corporation tax, is heavily reliant on a small percentage of highly remunerated employees. McMahon cautioned that any slump in a few sectors could affect both income and corporation tax. That being said, just because Government revenue is heavily concentrated doesn’t necessarily imply that it’s on the verge of reversal. It, instead, poses a risk that warrants a cautious strategy of not making everlasting expenditure commitments based on this income.
According to McMahon, the Irish economy as a whole is on a good track, with performance equal to or even surpassing its potential. Concurrently, the labour market has been steady, showing records in both high employment and low unemployment rates. Despite a decrease in inflation, mostly due to declining energy prices, domestically produced inflation stands high at around 4.4%. McMahon advised the committee that considering the strength of the economy, the budgetary policy should refrain from fuelling demand.
McMahon also brought to the committee’s attention that this is not the moment to adopt an ‘everything now’ strategy of tax reductions and spending increases. It’s a time when decisions “ought to be made.”