Wednesday 18 September 2019

Watchdog warns that budget policies have brought country 'back to the past'

Budget architect: Finance Minister Paschal Donohoe working on Budget 2020. Photo: Gerry Mooney
Budget architect: Finance Minister Paschal Donohoe working on Budget 2020. Photo: Gerry Mooney
Hugh O'Connell

Hugh O'Connell

THE State’s fiscal advisory watchdog has accused the government of implementing budget policies that have brought the country “back to where we’ve been in the past”.

In a dire warning to politicians today, the Irish Fiscal Advisory Council said the use of extra corporation tax revenues to cover budget overruns in areas like health has left the State vulnerable in an economic downturn which could now transpire in the event of a no-deal Brexit.

IFAC member Michael Tutty told the Oireachtas Budget Oversight Committee that the failure to run budget surpluses meant "we have nothing built up as yet because the surpluses weren’t realised".

He said the government had been advised by IFAC for "the last three years at least" to run budget surpluses, but these had not been realised because of cost overruns in areas like health.

"The opportunities were there, the projections were there, but in practice it just didn’t happen," he said.

Mr Tutty said the government has now "arrived at the situation that we  [IFAC] warned we shouldn’t have arrived at" because "we haven’t done the right thing in the good times".

Mr Tutty is a former senior Department of Finance official and Vice President of the European Investment Bank.

He added: "We are back to where we’ve been in the past and hopefully when we get through any slowdown that might occur people will realise that the Fiscal Council was right - that we should build up the money in the good times."

IFAC wants the government to establish a Prudence Account to save excess corporation tax receipts. "We shouldn’t be spending it, we should be putting it away and then put it into the rainy day fund," Mr Tutty said.

Responding to Mr Tutty’s comments, Fianna Fáil’s Brexit spokeswoman Lisa Chambers said: "It does seem that the government hasn’t learned from the mistakes of the past."

IFAC chair Seamus Coffey earlier warned TDs that Brexit could mean severe budgetary costs with the government needing to cut spending or raise taxes to prevent debt rising. But Mr Coffey said that a more likely scenario for a hard Brexit is a slowdown in the economy rather than a severe contraction.

"A large budget deficit could emerge due to falling taxes and rising unemployment-related costs. This is even before potential customs infrastructure and supports to hard-hit sectors are considered," he said.

"The Government might need to cut spending or raise taxes to prevent debt ratios from rising. Measures to deal with the costs of a hard Brexit should, however, be accommodated as far as possible."

Earlier, the Irish Tax Institute called for the retention of a tax break for highly-skilled workers from overseas with Brexit on the horizon. Nearly 800 people have availed of the special assignee relief programme (SARP) which is due to end next year. It gives high-paid executives an income tax break of 30pc on the portion of salary between €75,000 and €500,000. The tax break has cost the State over €40 million in recent years.

"Post-Brexit, we can also expect the UK to sharpen its suite of incentives to enhance its capacity to retain and attract global investment," ITI’s tax policy director Anne Gunnell said. "We believe SARP should be retained and extended beyond 2020."

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