Mr. Sebastian Barnes:

The council thanks the committee for inviting us. It is very nice to be back in person after two years. We value our engagements with the Oireachtas very highly. These are important opportunities and an important part of our work. 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. Our focus is on the overall fiscal stance, rather than on individual tax measures or spending items.

Yesterday, the council published its 22nd fiscal assessment report. It is based on the Government’s forecasts published in April in the stability programme update, SPU, 2022. The Irish economy has continued to grow, despite the challenges. Higher energy and food prices have taken inflation to the highest rate in a generation. While this will slow growth in 2022, the economy is expected to continue to grow in the years ahead, helped by the high-pay and high-tax sectors. Nevertheless, developments remain uneven across sectors and higher inflation impacts lower-income households far more than the average or wealthier households. Risks and uncertainties are also high. Inflation could remain higher for longer than the SPU assumes and there are downside risks to activity. We also note with concern that the SPU only projects three years ahead to 2025. This undermines a medium-term approach and good planning for budgetary policy. The council strongly recommends a return to five-year-ahead forecasts as was committed to by the Department of Finance and confirmed by the Minister in the past.

The budget balance is being boosted by revenues from a faster-than-expected recovery from Covid-19 and continued growth in high-pay, high-tax sectors. Over the medium term, the budget balance is set to reach a surplus in 2023 and to improve to a surplus of 2.7% of GNI* by 2025. This should help to put Ireland’s debt ratio on a steady downward path to reach 80% of GNI* by 2025, down from 106% of national income in 2021. However, there are significant pressures on many spending areas. Some of these are known, others have not been factored into the budgetary plans. In terms of spending, we broadly know that, first, higher inflation creates significant spending pressures. The council estimates that each one percentage point increase in inflation in the economy would create pressures on Government spending of approximately €700 million just to stand still if pay, welfare, pensions and the costs of goods and services were fully adjusted to maintain their value in relative terms as prices increase. We assess that the planned increases in current spending under the Government’s 5% spending rule over 2023 to 2025 would not be sufficient if the Government opted to fully maintain existing supports and services in real terms, although for later years the shortfall is relatively small.

This implies that the Government will need to make choices between accommodating price pressures, other changes to spending plans and revenue-raising measures. Second, there are likely to be temporary costs associated with the war in Ukraine. Of the €7 billion in contingencies for spending set out in budget 2022 back in October, €2.5 billion remains unallocated. This may be spent on humanitarian assistance for Ukrainian refugees but it could also be used for further temporary and targeted cost-of-living measures. Third, the Government plans to ramp up public investment spending to almost 5% of national income by 2025 and keep it at this high level out to the end of the decade. The increases should help to meet climate change and housing objectives but capacity constraints in the construction sector could see higher costs or lower output for a given price. Poorer value for money and possible spending overruns could result and a high degree of diligence will be required. Fourth, many countries are considering raising defence spending in the light of the war in Ukraine. For Ireland, the report of the Commission on the Defence Forces establishes a range of different scenarios.

However, there are many areas where we are in the dark on the Government’s plans. The Government committed to halving Ireland’s greenhouse-gas emissions by 2030 but it has not factored in the full costs to the State of achieving this. Estimates from Mr. John FitzGerald in 2021, in a very useful piece of analysis, put the cost at an additional 1.7% to 2.3% of GNI* on average over the years 2026 to 2030. The Government has also not costed its planned major healthcare reforms under Sláintecare beyond this year and there is no clarity on how much progress has been made to date in terms of the overall cost of the reforms. The Government has also not responded to the Pensions Commission recommendations on how to address funding shortfalls in the pension system. Annual spending on pensions is set to rise by about 1.5% to 2% of GNI* by 2030 amid a rapidly ageing population. The upfront fiscal costs of auto enrolment also need to be built into future budgets, if implemented.

The Government faces a delicate balancing act between supporting the economy and vulnerable households in the face of higher inflation while not contributing to higher inflation through second-round effects. Sticking to the 5% spending rule, as the Government commits to and as the council welcomes, should help with that objective and with facilitating the debt ratio falling at a steady pace from high levels. Reducing the debt ratio in line with these plans would be appropriate to help build a buffer so that future shocks, particularly major downturns, could be cushioned by budgetary supports in a similar way to the response during the pandemic. Following the rule would also help to ensure that spending increases do not lead to excessive stimulus to the economy at the current time and would help avoid the risk of second-round effects on wages and prices potentially destabilising the economy and the public finances. However, sticking to the rule also highlights the difficult trade-offs that are involved. The various spending pressures that we have discussed raise significant questions about how they will be accommodated within the Government's spending rule alongside existing policies. Sticking to the rule could imply reductions in planned spending elsewhere or higher taxes.

In the background to all this, an ongoing concern of the council’s is the growing over-reliance on corporation tax to fund everyday public services. Corporation tax receipts represent nearly one in every four euro of tax revenue raised by the Exchequer and the top-ten paying companies account for more than half of those receipts, up from a quarter in 2008. The Government does not currently have a strategy to reduce this over-reliance. The council’s assessment is that the Government should clearly show the impact of excess corporation tax receipts on the budget balance, as we do in this report and it should take measures to reduce its reliance on corporation tax. The council has set out a way to achieve this by making contributions to the rainy day fund or running debt down. The Exchequer has benefited significantly from corporation tax receipts in recent years which could be considered excess, that is, beyond what is explained by the performance of the domestic economy. By using these excess receipts to fund ongoing expenditure, the Government has potentially opted not to set aside some €22 billion in a rainy day fund or to reduce net debt by a substantial amount.

I thank members for their attention and look forward to their questions.