Financial watchdog warns Government's plan to spend more and cut tax 'a risky strategy'

Tánaiste Leo Varadkar has said increased spending on public projects will be prioritised and there will also be a tax package for workers to ensure they are not impacted by inflation. Picture: Denis Minihane.

Government plans to boost the take-home pay of middle-income earners and to increase public spending risks overheating the economy, a financial watchdog has warned.

The Irish Fiscal Advisory Council (IFAC) has hit out at the Government for avoiding hard choices, saying that tax increases must be included in next month's budget.

However, Tánaiste Leo Varadkar has said increased spending on public projects will be prioritised and there will also be a tax package for workers to ensure they are not impacted by inflation.

"I think we should prioritise public spending and public infrastructure over the tax package, we're going to do that by a ratio of 9:1," Mr Varadkar said.

However, he said the Government also needs to "find some space" for a tax package, which is expected to increase the threshold at which people start paying higher rates of income tax.

He said a lot of people working in the private sector will not receive pay increases next year as companies are struggling in the wake of the pandemic.

"Without a tax package for middle-income earners, for people working in the private sector, in particular, they will see their real incomes fall because of the rising cost of living and we need to take that into account too," he told reporters at the Fine Gael think-in in Trim, Co Meath.

The Government has already indicated that the State pension will increase along with other payments as part of Budget measures.

Meanwhile, Minister for Foreign Affairs Simon Coveney today faces a motion of no-confidence over his handling of the Katherine Zappone appointment as a UN special envoy. Picture: Eamonn Farrell

IFAC has urged the Government to either raise taxes in tandem with ramping up public investment spending or slow down the pace at which it is increasing spend.

The financial watchdog said the Government’s plan to raise permanent spending by €4.2bn, or 5.5%, in 2022, while simultaneously cutting taxes by €500m “looks to be at the limit of what is prudent”.

It said the Government “at a minimum” needs to stick to its plans with any additional spending being met through higher taxation.

IFAC said running significant budget deficits for several years during a period of strong growth and with high public debt is “a risky strategy”. 

Meanwhile, Minister for Foreign Affairs Simon Coveney today faces a motion of no-confidence over his handling of the Katherine Zappone appointment as a UN special envoy.

Sinn Féin leader Mary Lou McDonald said her party's motion "goes to the heart" of politics in Ireland.

Ms McDonald said: "People know that you can't have effective policies when you have a political culture that it's all about insiders and who you know and who you rub shoulders with."