Budget 2024: Ifac warns Government not to be tempted by spending increase or tax cuts

The Irish Fiscal Advisory Council is also urging the Government to stick to its national spending rule

The Irish Fiscal Advisory Council estimates that Budget spending would need to increase by €5.6bn to cover increasing costs. Picture: iStock

The fiscal watchdog has stepped up its warnings should the Government be tempted to tap into windfall tax revenues, currently flooding into the Exchequer, to hugely increase spending or slash taxes.

In its latest fiscal assessment report, the Irish Fiscal Advisory Council, or Ifac, said the Irish economy was already performing strongly and that using windfall corporation tax receipts to fund any substantial giveaway level of additional spending could not be justified at this time.

The report comes following comments made by Taoiseach Leo Varadkar in recent weeks where he said he would be pushing for income tax reductions in the autumn budget.

Ifac did not directly address the Taoiseach’s remarks but it did say pumping up a strong economy, regardless of the timing of the next election, would be of major concern. It is also urging the Government to stick to its national spending rule allowing net expenditure to grow at 5% per year so that the economy does not overheat.

The Ifac report detailed the significant sums the Government would be obliged to put aside just for it to keep pace with the effects of inflation on households.

Ifac estimates that if the Government sticks to the spending rules, it will have over €4bn in additional expenditure to use in the upcoming budget. However, according to the report, the estimated “stand-still” costs for Budget 2024 is €5.6bn which is €1.3bn more than projected under the spending rule.

Stand-still cost increases come from an ageing population resulting in additional money being spent on pensions, as well as increases to public sector pay and social benefits.

“To comply with the spending rule, the Government will need to make a choice between additional tax measures, the level of increase of public sector pay, and welfare rates and other spending increases,” the report said.

Of that €5.6bn, €2.5 billion relates to the indexation of public sector pay and welfare rates to forecast wage growth.

If the Government goes beyond their own spending rule, Ifac warned that this would mean using temporary revenues and corporation tax windfalls to finance “permanent spending and risks fuelling further inflationary increases”.

The Government is projecting that due to windfall corporation tax receipts, surpluses of over €10bn will be recorded this year and over €16bn next year. However, if windfall corporation tax were excluded, there would be a deficit this year and a surplus next year.

Sebastian Barnes, chairman of Ifac, said the council’s advice to the Government is to stick to its own spending rule in the upcoming budget because “it keeps the spending in line with the underlying revenue growth in the economy”.

“It also means at this point saving the excess corporation tax receipts which is a good thing to prevent the economy overheating,” he said.

The Ifac added that a prudent approach to the Budget would reduce the risk of further strains on capacity and of adding to inflationary pressures.