Key Messages
The Government now plans to repeatedly breach the National Spending Rule every year out to 2026. The Government’s intention is to go beyond plans set out in April, repeatedly breach the National Spending Rule every year out to 2026. The Rule sets a 5% limit for core spending increases net of new tax measures — a speed broadly matching trend growth that would help stabilise the economy and avoid fuelling price and wage pressures. Core net spending is now expected to be €4 billion higher by 2026 compared to previous plans.
These breaches are a serious cause for concern.
1) They risk repeating Ireland’s past mistakes, with employment already high and windfalls boosting the Exchequer. This would represent a continuation of procyclical fiscal policy.
2) The stance adopted undermines the National Spending Rule at a time when EU fiscal rules are not binding and likely to be distorted by GDP if and when new proposals are enacted.
3) The manner in which plans were revised weakens the credibility of Government projections, lacking transparency and not factoring in overruns and costs related to population ageing and the climate transition.
The Council recognises pressures for additional spending, but these pressures should be funded sustainably. Pressures in health, housing, infrastructure and climate-related areas are likely to need ongoing multi-year funding. If the Government wishes to ramp up spending across all these areas, it should ensure that the outlays can be maintained on an ongoing basis and not just based on receipts expected to prove temporary.
Looking to Budget 2024, the Council assesses that:
• The Government should adjust its plans to stick to its National Spending Rule. This would ensure more credible and sustainable fiscal plans. It could be achieved by introducing offsetting tax increases or spending adjustments elsewhere. To this end, there is a role for developing more comprehensive reviews of existing programmes.
• There is little to no justification for further temporary non-core measures in Budget 2024. Energy prices are falling and temporary measures risk adding to price pressures. Additional unfunded measures, given the existing pressures and low unemployment, would represent a further shift toward a more procyclical fiscal policy.
• The Government needs to improve its long-term planning. The Government’s fiscal plans only go to 2026, right before new estimates from the Council suggest climate costs will mount (Casey and Carroll, 2023). Ageing pressures will also begin to deepen towards the end of this decade.
• The Council welcomes proposals for a new Savings Vehicle — temptations to spend more resources immediately should be resisted, without offsetting measures elsewhere. There are substantial pressures for additional spending and there is a good case to be made for additional public investment. However, the State already has ways to achieve that. The National Spending Rule allows additional spending provided this is offset elsewhere, while the National Development Plan provides a framework to plan longer term capital needs. The rationale for an investment fund is weak. It risks simply being used as a means of ramping up capital spending in the short term even more than currently planned, and at a time when getting value for money is challenging.
• The Government should reinforce its National Spending Rule as a “first line of defence”. The Government’s National Spending Rule could continue to prove a useful tool to ensure the public finances are managed sustainably. But it needs to be reinforced and adhered to.