The government’s fiscal strategy for next year is appropriate, according to the Irish Fiscal Advisory Council (IFAC), but it has stepped up its warnings about the need to prepare for longer-term – and largely unavoidable – pressures on expenses. The aging of the population and the need to spend massively to combat climate change will have a major impact on public finances in the years to come, while at the same time tax revenues from polluting cars and fuels will fall sharply. Meanwhile, long-standing concerns about corporate tax risks remain.
Urged in recent years by IFAC, the government has pushed the budget into surplus and is now setting aside significant sums in a national reserve fund, partly in recognition that the extraordinary increase in the societies could begin to calm down.
The council’s latest estimate in a new tax assessment report is that some €9bn of the €21bn and more likely to be levied in corporation tax this year could be classed as income “unpredictable”. Without this cash, public finances would be in deficit. Ironically, it is entirely possible that corporate tax receipts for this year will exceed even the updated estimates. But with tech earnings under pressure and slowing economic growth, there is reason to be cautious in the years ahead.
IFAC believes the government has responded appropriately in developing its budget for next year, including significant support plans for households in response to the energy crisis. Many are temporary – although the government may come under pressure to extend them.
However, he is concerned about the long term and said the government now needs to plan more realistically for the financial pressures looming in the years to come – and those are significant. Population aging will lead to increased spending on pensions, health care and social assistance. The cost of climate change to the public purse will be significant under a number of headings. And, as the report points out, the government has not yet defined the total cost of the Sláintecare project. The recent decision to maintain the retirement age at 66 also has a significant longer-term cost, placing a burden on taxpayers for a long time.
By limiting its budget forecasts to the next three years, the government avoids having to deal with the implications of these longer-term issues. Having been hit first by the Covid pandemic and then by the war in Ukraine and the cost of living crisis, this is perhaps understandable. But IFAC warns that by 2024/2025 additional revenue may be needed if the real level of service spending is not to fall or borrowing to increase again. The rise in corporation tax has enabled Irish politics to avoid these problems. It will soon be time to face them.