Wednesday 26 October 2016

Department's estimate of extra available spending doesn't take account of inflation

Published 02/02/2016 | 02:30

Fiscal Council chair John McHale. Pic Frank Mc Grath
Fiscal Council chair John McHale. Pic Frank Mc Grath

The Department of Finance has acknowledged that its estimate for the amount of extra money available to the Government over the coming years for public spending does not take account of inflation.

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Nor does it take account of any public sector pay increases beyond 2018. The Department of Finance said about €8.6bn of so-called fiscal space could be available up to 2021, but the Irish Fiscal Advisory Council (IFAC) has warned it could actually be as low as €3.2bn, sparking a debate about whether the Coalition is over-inflating the amount of resources available to the next government as political parties prepare for the General Election.

In an information note published last night, the Department of Finance said the Fiscal Council was indexing its estimates of spending against inflation, and also assuming public sector pay increases would continue beyond the end of the Lansdowne Road agreement term in 2018.

"The difference between the department's figures and those of the IFAC reflects the fact that their estimates assume that various forms of social benefits (unemployment benefits, old age pension, child benefit payments etc) are indexed to the rate of inflation," the department said. "Their numbers are also based on the assumption of public sector pay increases beyond 2018.

"Any such increases in expenditure are a matter for the government of the day and require a policy decision as part of the annual budgetary cycle."

The department said that to include such measures in its figures would be an assumption on future policy decisions, which were a matter for the next government.

Fiscal Council chair John McHale said there were greater demographic pressures than the department was estimating, equating to about €1.4bn of the €5.4bn gap between it and the department's figures.

The remainder, he said, accounted for inflation.

"You have to recognise that a big chunk of the nominal fiscal space would be taken up as 'stand-still'," Mr McHale told the Irish Independent.

The department said the total amount of gross fiscal space would be €10.9bn over the period 2017 to 2021, which includes a technical assumption that income tax bands are indexed with inflation. On a net basis, the fiscal space is €8.6bn, allowing for demographics, the capital programme and pay increases out to 2018 under Lansdowne Road. But there was no automatic indexation of public spending to inflation, it said.

Irish Independent

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