Tuesday 6 December 2016

Public pay rises will force cuts to services or new taxes - says budget watchdog

Published 30/11/2016 | 02:30

Hard choices: John McHale. Photo: Frank McGrath
Hard choices: John McHale. Photo: Frank McGrath

Increases in public-sector pay will have to be paid for by hiking taxes, or cutting public services next year, the State's budget watchdog has warned.

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The Irish Fiscal Advisory Council offers a stark assessment of the Government policies it says are making the economy less resilient to a new crisis.

"There are hard choices to be made. Additional public-sector pay will have to be offset by lower spending elsewhere or higher taxes," said its chairman, Professor John McHale.

Potential alternatives open to the Government of either borrowing more, or using one-offs windfalls such as clawing cash back from bailed-out banks, would breach EU budget rules.

Prof McHale was speaking ahead of the publication of the council's first Fiscal Assessment Report since the Budget.

The Fiscal Council said Michael Noonan may be forced to formally explain a lack of compliance to the Dáil as early as next spring.

Prof McHale warned that Government spending was increasingly adrift of the post-crash fiscal rules.

The Fiscal Council was set up in 2011 as a budget watchdog, tasked with ongoing monitoring of the State's finances. Establishing the agency was one of a number of actions taken during the worst period of the crisis, with a view to preventing a re-run of boom and bust policy making.

But as the economy has recovered, it has struggled to get its message across.

Today it warns of a Government not sticking to post-crash budget rules. The breaches are relatively small. But current plans mean the State was not in compliance with a rule that capped the pace of spending increases, or with a requirement to improve the overall finances by a set level each year, he said.

"The degree of compliance (by Government) leaves us vulnerable," Prof McHale said.

According to IFAC, budgetary improvements stalled in 2016 after continuous improvements since 2010. Stripping away interest on the national debt and one offs like cash recovered from bailed out banks , the fiscal balance - the difference between what the State takes in and what we spend - actually worsened this year.

"There has been slippage and the extent of the slippage has been increasing," Prof McHale said.

Read more: Government invites public sector unions to Lansdowne Road Agreement talks following garda pay deal

He noted worrying echoes of how stamp duty and income tax from the property boom drove up public spending before the crash.

"The main reason to be concerned is that we seem to be willing to row back from the strong sense we were going to operate budget policy differently."

As an example, he said that this year almost all of the more than €1bn in higher than expected taxes collected by the Exchequer had already been gobbled up by higher than planned spending.

That includes €540m of extra spending by the Departments of Health and Justice.

The budget framework brought in after the crash should mean that spending increases only in line with the size of the economy, not just because tax income has gone up.

Fiscal Council member Seamus Coffey said that could be hard to assess, because of the difficulty measuring growth.

But he said recent increases in public spending had been supported by higher than expected corporation tax, especially from big multinationals.

That's grown from €4.5bn in 2014 to €7bn last year, Fiscal Council member Seamus Coffey said. But tax on profits ias volatile and could quickly fall away again, he said.

The Fiscal Council, and Prof McHale in particular, issued repeated budget warnings over the past two years without any apparent impact on Government policies.

That may change as under the bailout and post-bailout regime the role of the Fiscal Council was relatively sidelined by the Troika.

But next year, under the Fiscal Responsibility Act, it is the Fiscal Council that will make a formal assessment in April of how well rules are being kept.

If it finds breaches, the Finance Minister will have to either comply with the council's findings, or formally explain to the Dáil why targets are being missed.

Irish Independent

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