The budgetary watchdog has warned difficult decisions will have to be made in this year’s budget, as the Government may not have the funds it needs.
Nearly €7bn that is needed for the full indexation of public sector pay, pensions, welfare payments, and existing plans exceeds the almost €5bn available for core spending increases, according to The Irish Fiscal Advisory Council, or Ifac.
The council said that this year’s Budget, which has been dubbed a cost-of-living-budget, will need to “strike an appropriate balance” between protecting vulnerable households, and avoiding stoking inflation.
The council also urged government in its pre-budget submission to use a rainy day fund or a new national pension reserve fund to save excess corporation tax receipts.
Ifac said by doing this the State will gradually reduce its over-reliance on these “risky revenues”.
The watchdog said it is likely that, this year, corporation tax receipts will overtake Vat as the second largest source of tax revenue.
The council said corporation tax receipts are highly concentrated, as well as being the most volatile and least predictable of the main taxes collected by government.
Some 53% of net receipts in 2021 came from 10 companies.
This is not the first time Ifac has warned government about its overreliance on corporation tax receipts. In 2019, it gave government a similar recommendation to put these receipts into a 'prudence account'.
In its latest pre-budget submission, Ifac also expressed concern that the Government faces major challenges in the coming years and decades that have not been fully costed or built into its budgetary planning.
One of these challenges is the rapid ageing of the Irish population, which Ifac said will put pressure on pension and healthcare spending at the same time that growth is likely to slow.