Government should run 'bigger surpluses' to save for future, says Ifac

The chairperson of Ifac, Séamus Coffey, said the Irish economy is 'performing well' and budgetary policy is 'adding money into the economy when it is not needed'. File Picture: Sam Boal

The Government should be running “bigger surpluses” and saving more because, at present, surpluses projected for next year won’t be enough to meet the contribution requirements needed for the two investment funds, the Irish Fiscal Advisory Council (Ifac) has warned.

In its latest fiscal assessment report, and following on from the budget announcement last month, Ifac criticised the shortsightedness of the Government’s budgetary process and its continued heavy reliance on corporation tax receipts.

The council said that the country is facing significant budgetary pressures in the coming decades, arising from an ageing population and the need to address climate change, with associated costs potentially amounting to 6% of national income by 2050 or €20bn in today’s terms.

Ifac said this comes as budgetary policy adds money into the economy when it is not needed, with spending, net of tax measures, set to grow by over 11% in 2025.

The chairperson of Ifac, Séamus Coffey, said the Irish economy is “performing well” and budgetary policy is “adding money into the economy when it is not needed”, which is also reducing the surpluses the country is expected to run.

Headline surpluses

“The Government is running headline surpluses, but notably for 2026 that surplus is due to reduce primarily due to budgetary policy. The planned general government balance for 2025 is around €10bn. For 2026, taking the numbers from the budget, the intended outcome is for the Government to run a surplus of €5bn,” Mr Coffey said.

“That is a €5bn reduction in surplus due to spending growth outstripping revenue growth in 2026.” 

Mr Coffey said a surplus this low means that the Government will not be able to cover the contributions to the Future Ireland Fund and the Infrastructure, Climate, and Nature Fund, which were both established to mitigate long-term issues facing the economy.

“The key point here is that the contribution to these funds could be larger than the planned surplus. The contribution will come in around €6bn to €7bn based on what we’ve seen today. One of them is €2bn, and one of them is a certain percentage of national income," he said.

“If the planned surplus is €5bn, the surplus wouldn’t be enough to cover the contributions,” he said, adding that the Government may not need to borrow to cover the shortfall, but it could dip into cash reserves.

“The Government should be running bigger surpluses today and setting more aside into savings funds because the economy doesn’t need it now and we will need it down the line,” he said.

Deteriorating fiscal position

Ifac pointed out that the underlying fiscal position, when the excess corporation tax receipts are stripped out, has also been deteriorating in recent years.

“From 2022 on, when you strip out that excess corporation tax, the underlying position is getting worse. For 2026, [with] the headline surplus of €5bn, [there could be] an underlying deficit of €14bn once that excess corporation tax is stripped out,” Mr Coffey said.

The reliance on the corporation tax from just a handful of larger companies is also expected to get worse next year when pillar two tax reforms come into force. Large companies will now have to pay an effective tax rate of 15%, up from 12.5%.

The council also criticised the most recent budget announcement for containing no forecasts beyond next year, and the Government has not set any rule or guide for budgetary policy.

Mr Coffey said the “outlook is not very long, and the figures in the budget go as far as 2026”.

“It’s as if 2027 doesn’t really exist … The Government is budgeting like there is no tomorrow.” 

Ifac is calling on the Government to use budgetary policy to smooth the economic cycle by supporting the economy when it is weak and showing restraint when it is strong.

It also called for a domestic fiscal rule to guide spending growth net of tax changes.