Ifac: Budget to allow for paltry income tax cuts

Finance Minister Paschal Donohoe has only €600m in additional tax cuts and spending increases - which may, at best, only allow him €300m in income tax cuts, the Irish Fiscal Advisory Council (Ifac) has said, in its first major report ahead of October’s budget.

In the report, the watchdog reprimands budget decisions in the past that ramped up spending funded from uncertain corporation tax bounties and says that if the Government were to follow the recommendations of Ifac and that of its own advisers, the finance minister should only announce “minimal new tax and spending measures on budget day”.

Income tax cut measures of €300m would barely be enough to fund a 1% cut in the upper-tax band.

The fiscal watchdog has only the power to rap the knuckles of Government and in recent years, successive finance ministers, including Michael Noonan, have effectively ignored the Ifac pre-budget soundings.

The watchdog again warns that the danger remains of further spending “slippages” and has unveiled its own big idea for a “prudence account”.

This would not replace Mr Donohoe’s advanced plans for a so-called Rainy Day fund but rather soak up any future huge bounties of corporate tax revenues.

The account could, in turn, fund the Rainy Day fund or be passed onto the National Treasury Management Agency for it to pay down national debt.

“Something needs to be done,” Ifac chair Seamus Coffey told reporters, referring to the huge rise in corporation tax receipts that have helped fund day-to-day spending overruns.

Its prudence account, it estimates, could have helped safeguard as much as €6bn in recent years the Government tapped from a small number of companies in corporation tax revenues, which were not generated from the domestic economy.

Last year, Minister Donohoe’s spending white paper just days before his official budget unveiled an additional €1bn in spending to plug the huge overspending in day-to-day health expenditure.

“For 2018, the Government raised gross voted-spending by €1.3bn more than planned. This was largely due to health overruns.

“At budget time, a €1bn overrun was expected for 2018, but post-budget spending turned out to be a further €0.3bn more than planned again,” Ifac said in its latest assessment.

“The net impact of the tax and spending measures announced on budget day meant a package of €1.1bn. The 2018 Summer Economic Statement indicated that a package of €0.8bn would be introduced. These repeated revisions to plans undermine the credibility of the budgetary process,” the watchdog said.

As in previous reports, it also finds fault with the Government’s medium-term fiscal plans out to 2023 which it says “are not credible” because the arithmetic is based on “implausible” spending plans which do not take account of the costs of plans already announced in recent years.

It said the Government “needs” a medium-term strategy that includes a new debt reduction target based on the modified measure, and not GDP which flatters the State’s true indebtedness level.

A credible budget strategy would also involve setting what it calls a speed limit to spending and expenditure ceilings and through the prudence account.

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