Ireland's Fiscal Challenges and the Need for Sustainable Policies
Ireland is facing a growing fiscal challenge as it continues to rely heavily on corporate tax revenues, which are considered volatile and risky. According to the Irish Fiscal Advisory Council (IFAC), the government will need to borrow in order to meet its commitments to various saving funds. This comes as Ireland is set to increase spending at a faster rate than any other European economy in the medium term.
The Role of Saving Funds
The government has established several saving funds over the years with the intention of stabilizing public finances and funding long-term policy goals. These include:
- Social Insurance Fund
- Future Ireland Fund
- Infrastructure, Climate and Nature Fund
- Ireland Strategic Investment Fund
- National Training Fund
However, IFAC pointed out that some of these funds were created to save volatile revenues for future spending. Yet, the government is now planning to spend most of these revenues rather than save them. The council noted that planned surpluses are not sufficient to fund contributions to these funds.
Corporate Tax Revenue and Budgetary Deficit
Despite criticism from opposition parties regarding the use of corporate tax receipts, IFAC stated that the government is actually spending the majority of these funds. The council warned that the budgetary deficit, excluding corporation tax receipts, will continue to widen, from a forecast €11 billion this year to almost €21 billion by 2030. This means the government’s reliance on corporation tax will grow.
Interestingly, these underlying deficits occur at a time when the economy is performing well, with high employment and rising wages. However, critics, including IFAC, have long warned that if the sources of corporate tax receipts — mostly American tech and pharmaceutical companies based in Ireland — were to dry up, the government’s finances would face a major shortfall.
Unsustainable Spending Growth
IFAC warned that the government is set to increase spending to unsustainable levels. Spending is expected to rise by more than 7% per year until 2030, significantly higher than the sustainable growth rate of the economy, which is around 5%. At the same time, revenue is becoming increasingly concentrated, mainly coming from corporation and income tax.
Despite this, the government recently cut VAT for the hospitality sector and spent a significant amount on energy supports already this year. Outside of these measures, the council identified persistent budgetary overruns in government departments as a major factor contributing to spending increases.
Budgetary Overruns and Forecasting Issues
Since Budget 2024, overruns have driven nearly 30% (€6.8 billion) of spending increases. IFAC noted that further overruns are already emerging this year, particularly in health and education. Another issue leading to overruns is poor budgetary forecasting.
"General government forecasting continues to be poor," the report said. The council has previously criticized the government's forecasting methods, which rely partly on "often unreliable survey responses from non-exchequer general government bodies," such as RTÉ and Irish Rail.
"Forecasts for non-commercial semi-state bodies have been a significant source of recent errors," the council said. "This approach creates a disconnect between general government forecasts and gross voted expenditure forecasts."
Case Example: Department of Social Protection
IFAC provided an example of the Department of Social Protection, which overspent its allocation last year even though social payments ended up being lower than forecast. This highlights the challenges in accurately predicting and managing public expenditures.
Recommendations for Fiscal Reform
In response to these challenges, IFAC made several recommendations, including the introduction of legislation. The council emphasized the need for Ireland to have its own domestic fiscal rule. This is partly because the medium-term plan is not an appropriate guide for budget decisions. The rule should be carefully designed and placed in legislation to ensure long-term fiscal sustainability.
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