Government unlikely to heed sage external advice

Government unlikely to heed sage external advice

As hard as it is to believe, we are now in the run-in to Budget 2020, which will be presented in the early days of October.

With the European and local elections out of the way, all political parties will now be able to turn their attention to a budget, which presumably will be the last in the current electoral cycle and will represent the end of the fiscal elements of the confidence and supply arrangement.

There is, of course, the small matter of the long Dáil summer break to be endured first, so the reality is that there are not too many Dáil days left until the Minister for Finance delivers his offering. This all assumes, of course, that there will not be a general election in September, but this does appear highly unlikely.

This week the Irish Fiscal Advisory Council (IFAC), which is the independent fiscal watchdog set up as part of the Troika agreement, issued its perspective on the macro aspects of the budget. It is important to point out that there is no obligation on Government to pay any attention whatsoever to the utterances of IFAC, and in fact the track record since its inception suggests that this is the favoured approach of the various finance ministers who have been in office since IFAC commenced operations.

IFAC is clearly concerned about the current trajectory of the public finances and is making very certain that it marks the cards of government, just in case something was to go horribly wrong for the economy and the public finances over the coming years. It also probably harbours some forlorn hopes that Government might actually listen to its advice.

The biggest concern that IFAC has is that somewhere between €3bn and €6bn of the €10.4bn of corporate tax receipts taken in last year are of dubious quality in terms of their sustainability.

Since 2015, there has been a steep upward adjustment in corporate tax receipts due to international tax changes, but nobody is too sure if this upward adjustment is sustainable or transitory.

Unfortunately, since 2015, the Government has effectively used this windfall to fund heavy public spending increases, and particularly to bridge the consistent overruns on the health side.

IFAC is justifiably concerned about growing expenditure on the basis of tax receipts that may prove transitory. We did this with construction and property-related tax revenues back in the early years of the century, and we all know how that turned out. The suggestion from IFAC is that those exceptional corporate tax revenues should be placed in a "prudence account," which would act as a buffer when the next economic and fiscal crisis arises.

There is about as much chance of Government heeding this sensible advice as there is of Waterford winning the 2020 All-Ireland in football or hurling. The political reality is that Budget 2020 will likely be the last one before the election, and the public and political pressure to increase spending on public services is intensifying by the day. That is the reality of Irish politics and we just need to accept that.

The general political reaction to the IFAC advice is pretty sickening to observe.

On one side of the political spectrum, some are arguing that Government should just use every cent available to build social and public housing.

On the other side of the political spectrum, there is a lot of sage nodding and approval of the message of prudence from IFAC, but at the same time they are hammering government to spend more money on everything, with the pay of the defence forces the latest addition to the lengthening list.

Based on current budgetary projections, the Minister will have around €2.8bn to devote to spending increases and any tax reductions in Budget 2020.

This might sound like a considerable sum of money, but when account is taken of pre-committed expenditure and important demographic factors, the Minister will have around €600m at his disposal to give away in tax reductions and new expenditure increases.

If Government is remotely serious about its "climate emergency" charade, it should introduce significant increases in carbon taxes, because this is the only effective and immediate way of addressing our irresponsible carbon behaviour.

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