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Tax Cuts Risk Public Finances: Irish Fiscal Council Warns

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In a world where politicians often prioritize popularity over fiscal responsibility, the Irish Fiscal Advisory Council (Ifac) has sounded the alarm on the dangers of tax cuts.

According to Ifac, political pressure to cut taxes in response to budget surpluses poses a significant risk to public finances, putting the government in a difficult position between new tax and spending measures, maintaining existing spending, and adhering to its own spending rules. Ifac’s warnings are particularly relevant in light of the challenges facing Ireland, including outdated fiscal projections and uncertainties around Ukrainian refugees and Mica redress scheme. Ifac’s recommendations for improvement are clear: the government must prioritize the National Spending Rule in 2024 to avoid overheating the economy or increasing reliance on unreliable tax receipts.

This is crucial, as the risks to public finances are significant and multifaceted. From outdated PSRI receipt forecasts to uncertainties around government spending, Ifac’s report highlights that there is much work to be done to ensure the sustainability of Ireland’s finances.

In this article, we will explore the challenges facing Ireland, the government’s fiscal projections, the risks to public finances, and Ifac’s recommendations for improvement. By doing so, we hope to provide a comprehensive analysis of the current state of Irish finances and the steps that must be taken to mitigate risks to public finances.

Challenges facing Ireland

Amidst the political pressure to cut taxes due to budget surpluses, Ireland is facing several major challenges that could pose a risk to its public finances.

One of these challenges is the ageing population, which could put a strain on healthcare and pension systems, leading to increased spending.

Additionally, climate change is a significant challenge that could lead to increased spending on environmental protection and mitigation measures.

Furthermore, the healthcare system in Ireland faces significant challenges, including implementing the Sláintecare reform program, which aims to improve healthcare services and reduce costs.

Lastly, increasing defence spending is also a pressure facing Ireland, particularly in the context of Brexit and potential security threats.

Addressing these challenges will require difficult choices between new tax and spending measures, maintaining existing spending, and staying within the government’s 5% spending rule.

It is essential that Ireland improves its long-term planning and develops credible plans to manage these pressures to ensure the sustainability of its public finances.

Government’s fiscal projections

The Government’s fiscal projections have been scrutinized by the Irish Fiscal Advisory Council, which has identified several methodological shortcomings in the State’s Stability Programme Update. The Council highlighted that the Government’s forecasts only extend until 2026, the minimum requirement under rules, and there is a need for long-term planning, particularly in relation to climate change, ageing population, and health and pension pressures. Moreover, the Council noted that the public finances are being boosted by exceptional but unreliable inflows of corporation tax receipts from foreign multinationals, with just three corporate groups accounting for 30% of receipts from 2017 to 2021. There is a risk that this could reverse due to firm-specific factors or changes in the international tax environment, which could pose a challenge to Ireland’s fiscal position.

To provide a better understanding of the Government’s fiscal projections, a table is presented below outlining the main fiscal aggregates from the Stability Programme Update for the years 2022 to 2026. The table shows that the Government expects the underlying deficit, excluding excess corporation tax receipts, to narrow to 0.6% of GNI* this year, with the first underlying surplus in 17 years projected for 2024. The net debt-to-GNI* ratio is also expected to decline by 23 percentage points between end-2022 and end-2026, from 69% to 46%, with windfall corporation tax receipts projected to account for about two-thirds of this fall. However, the Council cautions that the reliability of these projections is uncertain, and the Government should stick to the National Spending Rule in 2024 to avoid overheating the economy or increasing reliance on unreliable tax receipts.

Fiscal Aggregates20222023202420252026
Underlying Balance (Excluding Corporation Tax)-1.5%-1.0%0.1%0.5%0.9%
Underlying Balance-0.2%0.2%0.9%1.1%1.3%
Gross Debt / GNI*107.1%102.7%94.5%83.0%70.6%
Net Debt / GNI*69.0%61.7%50.2%36.6%46.3%

Risks to public finances

Political pressure to reduce taxes in response to budget surpluses poses a potential peril to Ireland’s fiscal position, according to the Irish Fiscal Advisory Council (Ifac).

While the government has allocated only €500 million for tax measures in the budget, the Ifac warns that inflation-proofing the tax system by indexing income bands and credits would cost €1.3 billion in 2024.

This leaves the government with difficult choices between new tax and spending measures, maintaining existing spending, and staying within its own 5% spending rule.

Furthermore, the Ifac highlights several methodological shortcomings in the government’s fiscal projections.

The costs of auto-enrolment retirement savings system and Christmas bonus are not factored into the government’s projections, and public finances are being boosted by exceptional but unreliable inflow of corporation tax receipts from foreign multinationals.

There is a risk that this could reverse due to firm-specific factors or changes in the international tax environment.

In the long term, the government needs to improve its planning to manage the challenges of climate change and ageing population, while developing more credible plans to manage ageing pressures in health and pensions.

The Ifac recommends that the government should stick to the National Spending Rule in 2024 to avoid overheating the economy or increasing reliance on unreliable tax receipts.

Recommendations for improvement

Improving long-term planning and developing credible strategies to manage the challenges of climate change and an ageing population are recommended by the Irish Fiscal Advisory Council. The council emphasizes the need for the government to plan beyond the minimum required by rules, which is until 2026. It suggests that the government should develop more credible plans to manage the pressures of healthcare, pensions, and climate-related costs.

Additionally, the council encourages the government to stick to the National Spending Rule in 2024 to avoid overheating the economy or relying on unreliable tax receipts.

Furthermore, the council recommends the proposed Long-Term Savings Fund as a key measure to support sustainability in the pension system. The fund could also provide a means to save corporation tax windfalls and prevent the government from using temporary revenues and corporation tax windfalls to finance permanent spending that could fuel further inflationary increases.

The council highlights the importance of following the National Spending Rule in 2024 to avoid repeating past mistakes and suggests that long-term planning and credible strategies are necessary for the government to manage the challenges facing Ireland’s public finances effectively.

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Aiden
Aiden
Aiden is a skilled writer who has found his calling as a journalist 2 years ago. With a passion for storytelling and a keen eye for detail, he has quickly made a name for himself in the industry. Aiden's articles are well-written and informative, and he takes great pride in his work. He has a knack for finding the most interesting angles on any story, and his writing is always engaging and thought-provoking. In his free time, Aiden enjoys reading, hiking, and spending time with his family.

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