Plans by Finance Minister Paschal Donohoe to spend €500m in his first budget in October will be the smallest amount spent since the end of austerity at a time when spending demands from business and political groups has increased.
The room in ‘fiscal space’ — the net amount available for tax cuts and spending increases — detailed in his Summer Economic Statement may be even smaller, at €300m, because the plans do not account for the increased spending for public pay rises under the renegotiation of the Lansdowne Road accords.
The budget, which may be the last before a general election next year, will be substantially smaller than the previous two budgets announced by predecessor Michael Noonan. Those measures added to the spending base and under EU spending rules, curtailed Mr Donohoe’s scope for tax cuts and spending increases.
Mr Noonan announced in October 2015 €1.5bn in extra spending days before unveiling a further package of €1.5bn in his official budget speech.
The budget watchdog, the Irish Fiscal Advisory Council, has said that the previous two budgets ramped up the spending base and meant Ireland breached the EU spending rules last year and is on course to breach them again this year. Mr Donohoe told journalists he had a net €500m available in new “discretionary measures” in his budget. He said the Government would adhere to the EU rules.
The head of the Irish Fiscal Advisory Council watchdog welcomed the commitment by Mr Donohoe to stick to the rules but said that the new finance minister has little room to go beyond his opening estimate for a €500m package in tax cuts and spending increases, without significantly increasing taxes or curtailing spending in other areas.
Watchdog chair Seamus Coffey also expressed concerns that Mr Donohoe’s plans to inject €500m, half the originally proposed €1bn, into a ‘rainy day’ fund from 2019 would be effective in safeguarding the economy from potentially overheating in the coming years.
Mr Donohoe said that the Ireland Strategic Investment Fund could possibly inject more funds into the rainy day fund. The fund was set up during the depth of the crisis to ensure the conditions that led to Ireland’s disastrous economic collapse would never be repeated. It has said the Government breached EU spending rules in 2016 and was heading for “a planned breach” this year too.
“In any contra-cyclical policy, a rainy day fund is part of that policy. It is not clear from the limited proposals for an Irish rainy day fund that it is in line with an effective contra-cyclical policy,” Mr Coffey told the Irish Examiner.
“Ireland Strategic Investment Fund is happy that the Government is giving a commitment to adhere to the fiscal rules and that there can be no more need for a fiscal stimulus,” he said.
Mr Donohoe said the reworked plans for the rainy day fund would make €500m available for spending on capital projects.
“While a commitment to increase infrastructure investment is welcome, waiting until 2019 to increase investment will consign many of Ireland’s regions to a decade of lost growth, exacerbate social inequalities and continue to see Dublin congest,” business group the Construction Industry Federation said.
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