BY JOHN ELLIS, FINANCIAL ADVISOR
Last week I wrote about getting ready for Budget Day. This week, the focus turns to what the Fiscal Council is saying about the numbers. With six weeks to go, the Minister will stand up in the Dáil on October 6 and set out the Government’s plans for 2027.
The Government has already signalled an €8.5 billion package. But the Irish Fiscal Advisory Council’s latest pre-Budget assessment suggests that the figure announced on the day may not tell the whole story. What matters, the council warns, is how much the State actually ends up spending.
That is becoming a familiar problem. In the past decades, Government spending has come in more than €2 billion above budget each year, on average in today’s money. According to the council, the last year in which spending finished at or below the figure announced on Budget Day was 2013.
Health spending is already running ahead of plan this year. The council now expects the eventual overspend in 2026 to reach closer to €2.1 billion, around three times the €700 million currently acknowledged.
That makes the plans for next year harder to judge. The Summer Economic Statement already points to net spending growth of 6% in 2027, while the economy’s sustainable growth rate is estimated at around 5%.
The council thinks that pace is too fast. Ireland is already in a strong economic position, with employment continuing to rise, and there is little need for another major injection of demand. More spending could instead feed into prices.
Recent budgets, the council estimates, have added around 0.4 percentage points to inflation. For an average household, that works out at roughly €230 to €250 a year. If the same pattern continues, the cost could be approaching €1,000 a person by 2030.
But the €8.5 billion headline figure is misleading in another way. Before the Government introduces any new measures, around €8 billion is expected to be taken up in 2027 by demographic pressures, an ageing population and existing commitments, including the public-sector pay deal. That leaves considerably less for genuinely new measures than the €8.5 billion headline suggests.
Then there is corporation tax. Receipts reached a record €33 billion last year and are continuing to rise. The Government is spending roughly €7 for every €8 it collects in corporation tax, leaving only €1 aside. That looks comfortable while the receipts keep coming in. The problem is what happens if they don’t?
Without corporation tax receipts, the projected surplus this year would turn into a deficit of more than €10 billion. That leaves the public finances unusually exposed to a source of revenue that can change quickly and is concentrated among a relatively small number of multinational companies.
The Government’s medium-term plan is to keep spending growth at an average of 6%. But the Fiscal Council argues that this still leaves Ireland too dependent on corporation tax.
Its recommendation is for Ireland to introduce its own domestic budgetary rule, backed by legislation, which would broadly link net spending to the economy’s sustainable growth rate. The idea would be to impose more discipline when tax receipts are strong while protecting public investment from the kind of sharp cuts seen after the financial crisis.
None of these concerns are entirely new. General Government spending has increased by 54% since 2019. Some of that increase is unavoidable. Ireland has a larger population, the population is getting older and inflation has pushed up the cost of providing public services.
But the Fiscal Council also points to what it describes as “bad planning” and “poor expenditure management”. When tax receipts are flowing, there is less pressure to make difficult choices about what the State can actually afford.
The Fiscal Council is not predicting a collapse in the public finances. Nor is it arguing that the Government should stop spending altogether. Its warning is more gradual. Ireland is allowing spending to run ahead of the economy, while becoming increasingly reliant on corporation tax receipts that cannot be taken for granted.
The Government has six weeks to decide what it wants to do about that. The more important question may be how much of it survives once the spending begins.
john@ellisfinancial.ie
086 8362633
