Business Irish

Thursday 14 December 2017

Watchdog warns State spending is Brexit risk

Seamus Coffey, the chairman of the Fiscal Council
Seamus Coffey, the chairman of the Fiscal Council
Colm Kelpie

Colm Kelpie

The Government's strategy of pushing strict EU spending rules as far as they can go is not the way to Brexit-proof public finances, the State's budgetary watchdog has warned.

Extra public spending in 2015 and 2016 outside of what was announced in the budgets shows that the days of "if I have it, I'll spend it" haven't ended, the Fiscal Advisory Council has said. That spending will have added an extra €8bn to public debt by 2021, the body said.

In its latest assessment, the council warned further similar increases in public spending could risk Ireland significantly deviating from EU fiscal rules.

"Fiscal policy can play an important role in leaning against the wind, particularly if the economy is performing strongly now, and we do view that there are risks down the line," said Seamus Coffey, the chairman of the Fiscal Council, pictured.

"You don't Brexit-proof the public finances by using all the fiscal space and pushing the fiscal rules as hard as you can now. What capacity do you have then when there's a downturn in the economy? The time to make space to deal with some of these problems is now, when the economy is performing well without the need for additional fiscal stimulus."

In its latest assessment, the council said fiscal policy needs to be cautious.

It said that since a deficit of less than 3pc of gross domestic product was achieved two years ago, the Government has shown a "minimalist" approach to complying with the fiscal rules.

It said the rules were breached in 2016 and a further breach is planned for this year.

"Further increases in expenditure, like those seen in 2015 and 2016, could risk a significant deviation [in the fiscal rules]," Mr Coffey said. This could result in the triggering of sanctions or ultimately, financial fines.

"The Government policy thus far on minimum compliance is risky," Mr Coffey said. He added that the unexpected spike in corporation tax receipts in 2015 has already been spent.

"In both 2015 and 2016, these revenues were used to fund in year spending increases. Yes we go through the budgetary process in October, but in 2015, on the Friday night before the budget, there was supplementary spending announced of around €1.5bn.

"In 2016, in July, there were revised estimates of close to €1.5bn - these are being funded by the increases in corporation tax, and in a sense being allowed, to some extent, from anomalies in the fiscal rules. That increase in corporation tax, by and large, it has been spent."

He said the debt would now be lower if that money had been put towards debt reduction.

Any further increases in spending in 2017 will have to be offset by lower spending in other areas, or higher taxes, including issues on public sector pay. "For 2017 all the room has been used," Mr Coffey said. "We had hoped that we had moved away from the days of 'if I have it, I'll spend it', but 2015 and 2016 doesn't show that."

Mr Coffey said that based on Budget 2017 figures, the gross fiscal space for 2018 is estimated at €1.8bn. About €600m of that would be on demographic pressures, leaving a net fiscal space of €1.2bn. From that, there is a carry-over effect from Budget 2017 of about €700m, leaving a net fiscal space of about half a billion.

Meanwhile, the ESRI has said tax and welfare measures during the recession ensured the rise in income inequality in other countries hasn't occurred here.

Although income inequality has been rising across many OECD countries, Ireland's experience has been different, the think tank argued.

Irish Independent

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