IFAC sounds warning on budget spend

By Pádraig Hoare

An increase in interest rates and a reduction in corporation tax receipts, as well as a constant overrun in budgets like health, could leave the country “in a position we do not want to go back to” if a slowdown in the economy occurs.

That was the conclusion of Irish Fiscal Advisory Council (IFAC) chair Seamus Coffey, who told the Budgetary Oversight Committee that although unlikely, a large deficit could open up rapidly in the country’s finances.

The UCC economics lecturer told TDs and Senators that a €6bn swing upward in revenues from the predictions of Budget 2015 for this year was outside the control of the general economy.

“These are things largely outside of our control. 80% of the corporation tax receipts are paid by multinationals and their activities.

The amount they pay doesn’t really affect economic activity. The interest bill is based of course on the interest rate environment, and we have seen a huge swing in our favour — huge tailwinds, even before you get near the cyclical recovery we have experienced.

“Of that €6bn unexpected gains since 2015, almost all of it has been absorbed through increased spend in the health area, or through a ramping up of capital spending. In 2018, even with that €6bn gain, we are expected to run a deficit. That is what leaves us in a vulnerable position —- that we could be in, and it is inevitable at some stage, a slowdown,” Mr Coffey said.

He added:

“If that is allied with an increase in interest rates, and for some reason a reduction in corporation tax receipts, we could — although it seems unlikely — see a large deficit open up very rapidly.”

Those temporary increases in corporation tax and reductions in interest rates might then be reversed, he said. “That is not a position we want to go back to,” Mr Coffey said.

Having funds set aside in the event of a counter cycle, or providing more for housing and health budgets was not a binary choice, Mr Coffey said — it was a matter of allocating funds and was a resources decision, he added.

There was no reason why resources could not be allocated to each, he said.

He warned that “an economy trying to do too much in too short a time” could lead to overheating, and back to the “rollercoaster of the last 30 years”.

“At present, we don’t identify significant overheating pressures in the Irish economy. The most recent forecasts from the Department of Finance would indicate that sort of relatively benign scenario is predicted to continue. Whether it happens or not is subject to question.

“But you think back to 2003-2004 and forecasts at the time gave a relatively benign scenario as well. When it comes to overheating, one area where we do see potential overheating emerging is in the housing area, whether it is in relation to the level of prices, the rate of price changes, or the impact of activity on the overall level of demand in the economy.

“We do think we are highlighting overheating, we do think we are pointing to housing as being a potential source of it...we’re glad other people are taking on board the concerns that an economy trying to do too much in too short a time can lead to (overheating).

"We shouldn’t be going from 15,000 in 2017 to 65-70,000 by 2020 and then dropping down to 20,000 again by 2025. We’d obviously like to see housing increase but to do so in a sustainable fashion.”

IFAC shared the concerns of TDs and Senators as to the constant overspend of the health budget every year, Mr Coffey said.

“One of the issues with these constant overruns in the health budget is that it undermines our ability to assess budgetary policy. The Government has set out a plan for 2019, which we have assessed and think is in line with prudent economic and budgetary management.

“But equally they did the same last year, and we assessed the plan they set out then, but now as we progress through 2018, those plans aren’t being adhered to. In the case of health, you get overruns that look set to run into hundreds of millions. A lot of it will be recurring and built into the base for 2019. We are seeing the underlying budgetary position deteriorate.

“We agree there should be greater monitoring of the health budget and a greater ability to predict what is to be required, and to set them out at the start of the year, not have a minister coming into a committee meeting in July, saying there will be a supplementary budget.”

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