Friday 21 October 2016

Fiscal Council says State needs extra €6bn over next five years

Published 08/06/2016 | 02:30

Leeway: Finance Minister Michael Noonan Picture: Tom Burke
Leeway: Finance Minister Michael Noonan Picture: Tom Burke

The Government will need an extra €6bn over the next five years just to maintain current spending needs, the State's budgetary watchdog has said.

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That's over half the projected amount of money the Government has estimated is available for extra spending out to 2021.

Finance Minister Michael Noonan has said the amount of leeway the Government has to spend on tax cuts or spending increases over the coming years is around €11bn.

But the Irish Fiscal Advisory Council (IFAC) has warned that the "stand still" requirement - the amount needed to maintain the current level of public services and benefits - is €6bn, accounting for inflation, public sector pay increases and demographics. That's before any sweeteners or new measures are introduced.

"There is room for new initiatives," said Fiscal Council chairman Professor John McHale. "But it's not the full fiscal space. A chunk of it is required to keep doing what we're doing."

In its latest economic assessment, the council said there was uncertainty about the fiscal position over the coming years due to a lack of published detail on the commitments in the Programme for Government.

But it said that the planned €900m that had been penned in for tax cuts and spending increases next year, coupled with €900m for existing spending commitments, was prudent, but warned there was no scope to increase spending through supplementary estimates.

The amount of so-called 'fiscal space' that would be available to the new Government became a source of controversy during the election campaign, as the council warned that in reality, the Government only had a fraction of what it was claiming to have available because the Department of Finance wasn't factoring in inflation and the full effect of demographic pressures.

The department said about €8.6bn could be available up to 2021, but the IFAC warned it could actually be as low as €3.2bn, sparking a debate about whether the previous government was over-inflating the amount of resources available to its successor.


In April, before the formation of the Government, Mr Noonan said up to €11bn was available because of an easing in strict European budget rules.

Prof McHale would not state what the council believes is the total leeway, as he said it wanted to wait until the Government provided its updated figures in the coming weeks.

But he added: "We have our own number at the moment. Whatever that number is, €6bn is required just to continue doing what we're doing."

The council said that if the economy was growing at a sustainable rate, the Government could use whatever available space was necessary.

But it warns that spending may need to be reined in if there are signs that the economy may be overheating. And it suggested the possibility of a rainy-day fund.

Prof McHale also urged caution around the out-performance of corporation tax receipts, warning that 40pc of corporation tax comes from 10 companies, up from 23pc in recent years.

"Corporation taxes are growing very strongly, but because of the dependence on just a handful of companies you have to be concerned that they could also sharply reverse," he said.

Meanwhile, a separate report from the council examines capital investment by the State. It points out that reductions in capital investment accounted for a disproportionate share of cutbacks between 2008 and 2014, with public investment falling from a peak of 6pc of GNP in 2008 to 2.2pc in 2015.

The Programme for Government allowed for an additional €4bn in investment compared with the current infrastructural plan out to 2021, which would raise average public investment to 2.4pc of GNP. But this would still remain among the lowest in Europe, the council said.

"From a forecasting perspective, maintaining public capital investment at such low levels might be difficult to sustain taking into account unmet demand following years of curtailed investment since 2008..." the report said.

Irish Independent

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