State's fiscal watchdog criticises Government for breaching own spending rules

The Irish Fiscal Advisory Council said the Government’s recent Summer Economic Statement "risks making high prices more persistent"

IFAC has said additional spending in the forthcoming budget undermines “undermines the credibility of the Government’s plans and the spending rule itself”. 

The State’s fiscal watchdog has sharply criticised the Government’s recent Summer Economic Statement saying it “undermines” their own spending rules and risks adding to inflationary pressures.

On Tuesday, the Government released its summer economic statement which would see core expenditure grow by 6.1% in the forthcoming budget, exceeding its own rule of limiting spending increases to 5% per year.

However, the Irish Fiscal Advisory Council (IFAC) took issue with the Government’s plans stating that this additional spending comes when inflation remains high and “capacity constraints” with worker shortages are “evident in the economy”.

IFAC said the Government's plans for spending and tax cuts go beyond those set out in April’s stability programme update and repeats a pattern that “undermines the credibility of the Government’s plans and the spending rule itself”.

“This is a clear case of procyclical fiscal policy.” 

IFAC, as well as the Central Bank of Ireland, had called on the Government to stick to its spending rules for Budget 2024 over concerns that additional spending could add to inflation.

The council said:

The additional core stimulus will likely add to annual rates of inflation by some 0.1 percentage points to 0.2 percentage points in the short term. This also risks making high prices more persistent as a result.

It also warned that there are still risks of spending overruns this year in areas such as health, children and social protection.

“Medium-term fiscal challenges remain to be addressed, including the costs of population ageing, climate change and the costs of implementing health reforms.

“While tax revenue may perform better than forecast in the coming months, this cyclical upswing in revenue does not provide scope for additional measures in the budget,” the council said.

Finance Minister Michael McGrath said that the spending increases strike a balance between investing in public services and supporting living standards while “not adding to inflationary pressures”.

Public Expenditure Minister Paschal Donohoe also said there would be a separate €4bn "non-core" package that will also be spent on items that are deemed as temporary and so will not come out of regular core spending.

These relate mainly to support being offered to Ukrainian refugees.