Mr. Seamus Coffey:

I thank the Chair and committee members for inviting us to appear before them today. We welcome the transition to revised EU fiscal rules. We value these engagements can see them as integral to our work. The fiscal council is responsible for providing honest and independent assessment of how the Government is managing the public finances and the economy. We shared a briefing with the committee in advance of the meeting. I will briefly summarise the points made there and touch on our thinking about where things should be headed.

The new EU the fiscal rules focus primarily on putting a speed limit on spending. However, these rules are unlikely to safeguard Ireland's public finances. First, they focus heavily on GDP, which makes debt and deficit ratios look overly benign for Ireland. Using GDP would give Ireland a debt ratio of closer to 40% as opposed to the 60% limit. The debt ratio would be more like 70% if more appropriate measures of economic activity such as modified GNI* were used. Why do we think GNI* is a more appropriate measure? It has a closer link to things that matter, including the more reliable tax revenues that Ireland raises - basically everything outside corporation tax - and things like jobs created in the economy.

Second, the EU rules do not account for Ireland's increasing reliance on corporation tax. This dependency on a small number of multinational companies is risky. The council estimates that just three multinationals made up 43% of corporation tax receipts in 2022. This means they are prone to sudden upswings and could be exposed to sharp reversals. Receipts might continue to increase but the risk remains that receipts could fall suddenly. We do not know what will happen. It depends on developments related to a handful of multinationals in just a couple of sectors. The tax receipts could reverse if there was a sudden shift in company fortunes, restructurings or a change in international or US tax policies. It is unclear what action, if any, the European Commission might take if Ireland goes beyond the net spending ceilings set out in its medium-term plan. So long as Ireland's debt ratio remains below 60% of GDP and the deficit below 3% of GDP, enforcement seems unlikely.

However, the Commission will continue to monitor Ireland's net spending and will report on how this fares compared with its initial plans. This means little formal scrutiny for Ireland under the EU's new fiscal rules. Like a motorway with unenforced speed limits, Ireland will for the most part be left to its own devices. The situation poses significant risks. With Ireland facing little external scrutiny under the new rules, the onus falls on the Irish Government to manage its finances responsibly. With each passing budget, Irish Governments may well decide to revise up the speed limit they stick to on net spending. The Commission will report on this but it is unclear to us whether any enforcement will be enacted for some time.

One of the only ways we might expect some restraint is if the next Government sticks to a domestic or national rule. Something like the net tax and spending rule introduced in 2021 would fit the bill but the Government would have to stick to it. Future governments can show they are serious about managing the public finances sustainably by reinforcing such an approach. This could be by bringing the rule into legislation or at the very least it could entail seeking cross-party agreement on how the rule should work. This would follow the successful examples of other countries such as the Netherlands, Finland and Sweden.

As elected representatives, the committee members will have a good understanding of the tension between meeting their constituents' immediate needs and ensuring public finances are kept safe over the long term. We understand there will always be a desire to address demands today. However, it is crucial to recognise that giving in to that desire often means building up risks for the future. This is usually in the form of large underlying deficits. If more spending is desired today, there is always the scope to do this sustainably. It can be by raising taxes or exploring ways to reduce existing spending. History, including Ireland's own, teaches us that there are significant economic, social and political costs to running unsustainable public or fiscal policies.

After the profligacy of the 2000s, Ireland's period of austerity lasted seven years. It added to the pain of rising job losses and changed the political landscape dramatically. Fiscal rules, such as the net tax and spending rule, provide a valuable framework for navigating these tensions. By clarifying and promoting the need for responsible policy in good times, such rules can help safeguard growth. They can preserve the Government's ability to respond to recessions and they avoid adding too much pressure to the economy in good times. By embracing these rules, Ireland's elected representatives could strengthen the foundation for sustainable growth in income and future prosperity.