Irish watchdog sounds alarm over budget plans

Budgetary watchdog the Irish Fiscal Advisory Council has put the Coalition on notice to change its budget in October because it believes plans for spending hikes and tax cuts will fall foul of the “letter and spirit” of Europe’s strict fiscal rules.

IFAC has warned that it believes that the Government’s plans for at least €1.2bn in tax cuts and spending increases in the budget break Europe’s debt-reduction target in significant ways.

The watchdog’s warning is highly significant because the Coalition is preparing for an October budget which will be last before the election. IFAC was set up three years ago by law with a mandate to scrutinise Ireland’s budgets and help prevent a return to the disastrous boom-and-bust economic cycles of the past.

Its warning also goes to the heart of the debate over whether the Coalition will use the “tax buoyancy” from a rapidly expanding economy to boost spending or reduce debt. Many analysts believe that the Coalition could be tempted into announcing dangerous budget giveaways before the election.

IFAC has only the power to advise, but its secret weapon is nonetheless that it can decide not to endorse the Government’s budget sums when Michael Noonan, the finance minister, presents the budget in October. IFAC said it will await to assess the budgetary sums then to see if Ireland will fail to meet EU rules, which stipulate the country reduces its debt burden in the coming years.

“But the policy for 2016 does not fully comply with the [EU’s] new fiscal rules. But having strict rules in framing a budget are very important to ensure we do not repeat the same mistakes as before,” said Prof John McHale, chairman of IFAC.

IFAC believes that the Government’s plans as laid out in its spring economic statement in April will reduce the so-called structural deficit by only 0.3 percentage points of GDP, when the rules require the Government to meet a target of double that figure of 0.6 percentage points.

Prof McHale also warned that the Government is at risk of breaking another rule, called the expenditure benchmark, which prohibits any bounty from one-off and unsustainable tax receipts or tax buoyancy being used to boost higher government spending.

The Government has said a €1.2bn budgetary package would be evenly split between measures to cut taxes and increase spending.

The Department of Finance said in April that a €1.2bn-€1.5bn package will “deliver compliance with the expenditure benchmark”. But IFAC warned that this policy already fundamentally broke EU rules.

“The treatment of tax buoyancy raising from the budget package as a discretionary raising measure [in 2015) would appear to be against the letter and spirit of the Expenditure Benchmark. The point of the Expenditure Benchmark is to ensure the expenditure growth is linked to sustainable revenue growth, which is in turn linked to growth in potential output and discretionary tax charges,” it said.

“Revenue growth based on temporary demand effects of an expansionary fiscal package does not meet this criterion. Furthermore, no provision for the use of ‘buoyancy’ appears in the formal descriptions of the working of the expenditure benchmark rule.”