Wednesday , October 20 2021

IFAC issues warn about government budget plans


The government will only have 600 million euros to increase spending or reduce taxes in the October budget, once existing commitments are taken into account, according to the state's financial watchdog.

According to the Irish Tax Advisory Board (IFAC), if the government maintains its plans, a total of € 2.8 billion in additional measures could be included in the budget, although € 2.2 billion of them already have been accounted for.

In its latest Fiscal Evaluation Report released this morning, IFAC says that while it is now operating close to capacity, the outlook vis-à-vis the economy is extraordinarily uncertain.

He says that government forecasts, which are based on an orderly Brexit, are balanced between the potential overheating on one side and an "exceptional adverse shock" of a more difficult exit than the supposed exit of the UK from the EU on the other.

It also points to possible changes in international tax arrangements, as well as increased protectionism, deceleration in the economies of Ireland's trading partners and other potential adverse financial developments.

IFAC says Ireland's net debt ratio remains the fifth largest in the OECD, making our creditworthiness vulnerable to rapid changes, and says little progress has been made on this issue since 2015.

In fact, the data suggest that the structural budget situation has worsened in recent years, says IFAC, because although the economy has performed strongly and corporate tax revenues have increased, the budget balance has not improved in the last four years.

In this regard, the council points the finger in part to the government to allow spending to move in recent years, with spending growth rising from 4.5% in 2015 to 6.7% last year.

This led, according to IFAC, to net spending last year after the financial crisis, which implemented the rules of infractions.

It also criticizes the government's medium-term spending plans from 2021 onwards, saying they are not credible, since the projections of spending that support budget projections are not accurate.

"The government's medium-term spending framework is not working," the report said.

"Repeated and procyclical reviews of spending ceilings seem destined to continue, which runs the risk of repeating the mistakes of the past, with revisions of expenditure ceilings now of magnitude similar to those immediately before the crisis."

The agency warns that corporate tax levels are now "far behind conventional levels and what the underlying performance of the economy would entail."

Indeed, it is said, between 3 and 6 billion euros of the 10.4 billion euros of taxes received by companies last year could be considered beyond what would be projected for an economy like Ireland at the moment.

As a result, it warns that although these benefits may last for several years, reversals could also be expected, unlike other unexpected revenues.

It also says the government needs to make a "credible commitment" to not using corporate tax revenue for long-term spending increases.

It suggests that one way to mitigate the risk would be to create a so-called "Prudence Account" in which extra revenue over and above the corporation tax during each tax year would be nullified.

That money could then be put into the rainy day fund, or given to the National Treasury Administration to reduce debt by the end of the year, he says.

In Brexit, IFAC warns that a disorderly exit of the UK from the EU poses "deep risks" to public finances and could lead to increases in the state's debt ratio.

In that case, he says, the government may be forced to cut spending or raise taxes to prevent an indefinite increase in the debt ratio caused by opening a budget deficit.

Overall, the board says the government should maintain its existing plans for this year, as outlined in the economic forecasts published in the Stability Program Update 2019 in April.

In particular, it warns that government should not be involved in raising spending for the remainder of the year unless it takes steps to cut spending elsewhere or increase revenue.

He says that the government's plans for 2019 indicated that the fiscal position would grow in the same trajectory of economic potential and inflation.

But it says that last year the government was more than expected, allowing spending to rise by € 1.3 billion, up from the € 3.2 billion initially forecast.

Much of this extra outlay went to health because of increased budget overruns, extra spending that IFAC had previously criticized.

The council says that the extra spending and fiscal measures announced in the 2019 Budget were more € 300 million higher than had been anticipated.

He says all these increases contributed to a faster pace of expansion than planned and a possible overheating of the Irish economy.

Next year, says the organization, budget caution should be exercised by the government, given the risks posed by Brexit, corporate tax, potential overheating, and faster-than-planned growth in spending in recent years.

He says that if the government maintains its plans, € 2.8 billion in additional measures could be included in the budget.

However, when pre-existing commitments such as increased public investment, public sector payment, provision for demographic changes and tax cuts are made, the actual amount available to the of EUR 600 million.

As a result, only minimal tax and spending measures will be possible on the day of the budget, with any additional expenses or tax cuts funded by additional revenue enhancement measures.

It adds that it would be better, if not all the fiscal space of € 2.8 billion, given the potential challenges facing the economy.

Revenue estimates that a 1% reduction in the highest 40% tax rate would cost € 340 million.

Responding to the report, Fianna Fail's spokesperson for Public Expenditures and Reforms Barry Cowen said it was critical that IFAC's warnings and conclusions be accepted by the government.

"Despite what the government wants us to believe, the country is sailing very close to the wind when it comes to state finances," he said.

"There is a serious lack of credibility when it comes to spending ceilings as they are almost always ignored."

"The 645 million euros in supplemental funding at the Health Department last year and the overhead on capital projects like the Children's Hospital and the National Broadband Plan are having a direct impact on Ireland's fiscal position, which means that there is very little room for maneuver in the next few years. "

"Fine Gael says it can be trusted with state finances, but when all is said and done, it's a complete fallacy and this report does the same."

However, in a statement before the report was released, the Finance Department said that the European Commission, as guardian of tax rules, has assessed Irish budgets to comply with tax rules.

He also said IFAC endorsed its predictions.

The department also said that the minister would publish a report describing soon how dependency on business tax could be reduced.

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