Mr. Sebastian Barnes:

The council wishes to thank the Chair and members for inviting us today. Joining me remotely are council members Ms Dawn Holland, Professor Michael McMahon, Dr. Adele Bergin and Mr. Alessandro Giustiniani, as well as our chief economist and head of secretariat, Dr. Eddie Casey. We value our engagements with the Oireachtas and as we see these opportunities as an important part of our work, we are happy to be here.

The council is an independent body established under the Fiscal Responsibility Act 2012. Its mandate is to endorse and assess the official macroeconomic forecasts, assess the budgetary projections, assess compliance with the fiscal rules and assess the fiscal stance. Its focus is on the overall fiscal position, rather than on individual tax measures or spending items.

The council’s fiscal assessment report, published yesterday, assesses the Government’s stability programme update, SPU, for 2021, which was published in April. It assesses the official projections to 2025 and the Government’s wider strategy.

The economy is set to bounce back as Covid-19 restrictions ease and as vaccines are rolled out. The economy has proven more resilient to repeated waves of Covid-19 restrictions than we had thought. While the Government’s official projections assume permanent losses, or scarring, of about 5% due to the pandemic, these forecasts seem to us to be relatively cautious. The council sees more upside to potential growth. The unwinding of savings could boost consumer spending and much of the rebound could be largely domestic in nature, such as supporting the services sector. However, there are still risks. Virus mutations could lead to further lockdowns or restrictions in the future, international tax reforms could reduce foreign direct investment, FDI, into Ireland, and Brexit‘s impacts could be worse than assumed.

Turning to the fiscal side, both Covid-19 spending and sharp increases in core spending mean a large deficit is likely again this year.

The Government expects a deficit of €18 billion or 8.4% of GNI*. The €5.4 billion of buffers set aside for 2021 look like they will be mostly used up for the extension of the support schemes, both spending we have seen so far this year and spending that would be required if those schemes were extended beyond June. However, the deficit should narrow as temporary measures end and as the economy recovers. The stability programme update projects the deficit to be about €12 billion in 2022 and to narrow to less than 0.3% of GNI* by 2025.

While it is welcome that the Government has provided new medium-term forecasts, the medium-term budget projections are poorly founded. The spending projections for later years assume current spending grows by 3.5% every year. The council’s estimates of stand-still costs imply current spending being about €1.2 billion higher than that by 2025. These stand-still costs assume our estimates of the cost of maintaining existing policies while fully allowing for price and demographic pressures. Capital spending projections in the SPU are also well above the numbers in the capital plan. Moreover, the SPU has income tax receipts forecast to grow unrealistically fast given Government plans to index tax credits and bands.

Adjusting the SPU forecasts, the council estimates the deficit would be around €2 billion higher in 2025 at around 1.2% of GNI*, also taking into account a bigger loss in corporation tax receipts. The deficit, however, could still close if growth is better than expected. The SPU projections are on a technical basis and do not reflect the cost of implementing policy changes set out in the programme for Government. There is little or no detail on the cost of major initiatives, including the substantial Sláintecare reforms to healthcare.

The Government has become ever more reliant on corporation tax receipts. Corporation tax receipts account for one in five euro of tax collected last year. Some 56% of corporation tax receipts last year were accounted for by just ten corporate groups. Major changes to the global tax environment threaten the sustainability of this tax base. The Government assumes global reforms will reduce corporation tax receipts gradually by €2 billion, but the impact could be far greater. A scenario considered in this report shows how just five firms exiting Ireland could see €3 billion of yearly corporation tax receipts lost.

The council assesses that large temporary supports to the economy have been appropriate. Unlike in the past, Ireland was able to boost spending and other supports during the downturn. This approach may have halved the contraction in the domestic economy in 2020. These measures are likely to be extended after June and may need to be extended on a more targeted basis into 2022.

The pandemic will leave Ireland with a high debt ratio, expected to still be above 100% of GNI* in 2025. The State has large resources on hand and interest rates are low, but higher debt levels mean a riskier debt path. The council estimates there is a 15% to 20% risk that Ireland’s debt ratio could be on an unsustainable path by 2025. This is not alarming, but it underlines the importance of returning to safer debt levels. Doing so would help to ensure future governments can respond to future crises in the same way the Government has done for Covid-19.

Closing the deficit by 2025 would help put debt on a downward path to safer levels. If the economy recovers as expected, this would mean modest or perhaps even no adjustment would be needed from 2023. However, this leaves no room for any new policy measures unless taxes are raised or spending falls elsewhere. If the Government does not raise taxes or reduce spending to fund new policies in the coming years, the projections suggest the deficit will not be closed and debt would remain uncomfortably higher. Budget 2021 included permanent increases in spending of at least €5.4 billion without setting out the long-term funding. This means much of the fiscal space that growth in the economy would have provided by 2025 has already been used up and committed.

Ireland faces significant medium-term fiscal challenges. These include reducing reliance on corporation tax, potentially costly adjustments to meet Ireland’s climate change targets and a rapidly ageing population. In addition, implementing the policies outlined in the programme for Government would lead to higher spending. This means a credible strategy is needed. The Government has failed to publish a credible medium-term strategy as it had promised with the SPU. The need to set out such a strategy is both essential and long overdue. The absence of realistic plans and any fiscal targets leaves the public finances without an anchor. It means overspending in the coming years is more likely to lead to larger than planned deficits or further use of corporation tax receipts to mask the overspending. The council has long called for reforms to how Ireland’s budgets are set. Three initiatives would help better anchor future budgets - credible debt targets, saving unexpected corporation tax receipts in a rainy day fund, and setting spending limits based on realistic forecasts. We look forward to answering the committee's questions.