24 Nov 2022

Govt’s budget strategy strikes ‘appropriate balance’ – IFAC

Filed under: Business News

The Irish Fiscal Advisory Council has said the Government’s budgetary strategy struck the “appropriate balance between protecting vulnerable households and avoiding inflation”.

In its Fiscal Assessment Report published today, the budgetary watchdog also warns that if the Government wants to keep within its own spending rule in next year’s Budget, it will either have to cut spending or increase taxes.

This is IFAC’s formal response to the Budget delivered by the Government at the end of September.

While broadly supportive, IFAC said it will be important for the Government to get back to its spending rule of 5% increases in future budgets.

It would like to see the rules strengthened and for what it terms a “short window” to be used to reduce the high level of government debt.

It warns that higher costs associated with the ageing population and the decision to keep the qualifying pension age at 66 means there is a shortfall of around €800m in planned expenditure over the next two budgets, if spending increases are to be kept under the 5% rule.

It said high inflation has “stunted” the recovery with real incomes expected to fall by 5% over the course of this year and next, and higher construction costs eating into investment under the National Development Plan.

It said Government revenues remain “strong” but it expects demand from abroad for exports to be affected by increased uncertainty and tighter financial conditions.

It said demand in the economy at home has already “slowed considerably” with inflation set to remain high into next year.

Over the medium term it highlights issues such as the increased costs of keeping the qualifying age for the state pension at 66, about which it said, “the Government should be transparent”.

It also said that when it comes to the cost of adapting to climate change that “detail is lacking on how targets will be achieved” and “the fiscal implications could be very large but have not been spelt out”.

The Chairman of the Irish Fiscal Advisory Council says the Government needs to step up its long term planning.

Sebastian Barnes warned that “really big costs coming”, such as aging, climate change and reducing the reliance on corporation tax receipts.

Mr Barnes said there has already been a slowing down in the economy but the crunch will really come over the coming quarter as domestic households face bigger energy bills.

Activity over the next couple of quarters will be flat, he said, and the economy will not really expand.

Overall the Government struck a sensible balance in the budget, he said, but if public services are to be retained, then taxes should be broadened and more things should be brought into the tax net.

The Minister for Finance has said the latest report from the Irish Fiscal Advisory Council has recognised that the Government “got the balance broadly right” in the recent Budget.

Paschal Donohoe said IFAC’s Fiscal Assessment Report “indicated that we put enough support in place to make a difference to our country, to our society and to our economy.”

He said the report also concluded that the Government did not implement measures that could trigger even deeper inflation.

“It is important to note that the Irish Fiscal Advisory Council did recognise that we have our budgetary strategy for 2023 appropriate, that we are doing enough to help households and businesses with the rising cost of energy but not putting in place measures that could actually make our inflationary and our cost of living problems even worse,” Mr Donohoe said.

In relation to Budget 2024, Mr Donohoe said the Government will “evaluate where our economy is at that point.”

He said the coalition is “really aware of the need to get the balance right”.

“We do recognise that the Fiscal Advisory Council have indicated that we got the balance broadly right for 2023 and I’ve little doubt that the Government will continue to aim to get that balance correct and appropriate for 2024 as well,” he stated.

Article Source: Govt’s budget strategy strikes ‘appropriate balance’ – IFAC – Robert Shortt – RTE

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