Mr. Seamus Coffey:

I thank the Chair and members for inviting us to appear before the committee once again. As the Chair noted, I am joined by my colleague, Dr. Adele Bergin, and our chief economist, Mr. Niall Conroy. We value our engagements with the Oireachtas highly and consider these opportunities an integral part of our work.

As an official independent body established under the Fiscal Responsibility Act 2012, the council's mandate currently revolves around four elements: endorsing and assessing the official macroeconomic forecasts, assessing official budgetary projections, monitoring compliance with fiscal rules, and assessing the Government's overall fiscal stance. There may be additional elements that arise from the transposition of a 2024 EU directive on independent fiscal institutions in national law, which is required to be done by the end of the year. The focus of the fiscal council is on the broader fiscal and macro perspective rather than any individual tax or spending measures.

In our latest fiscal assessment report, we assess the Government's official projections as set out in the 2025 annual progress report. The Irish economy is in a strong position as it enters a period of high uncertainty. Employment is at a record high with very low rates of unemployment. The economy is operating flat out, with no spare capacity. Employment in Ireland has increased by almost 500,000 since 2019. This job growth has been focused in two areas: multinationals and the public sector. However, tariffs and policy uncertainty could impact investment and exports. Even if trade policies revert to their 2024 terms, the uncertainty caused by the stop-start nature of tariffs has already disrupted investment plans and trade patterns. What sectors are included or excluded from tariffs will determine their impact in Ireland. Pharmaceuticals and the tech sector have avoided tariffs so far. These are two key sectors of the Irish economy that provide many high-paid jobs.

Given the economy is in a strong position, it does not require support from budgetary policy. Standard economics suggests the Government should support the economy when it is weak and show restraint when the economy is strong. A good example of budgetary policy helping during an economic downturn occurred during the Covid-19 pandemic. The council was in favour of budgetary policy supporting the economy in that instance. By contrast, recent budgets have pumped money into an economy that is already performing well. After accounting for exceptional corporation tax and a strong economy, the Government is running a substantial deficit. This is equivalent to more than €2,500 per worker. This is coming at a time when the European Central Bank is cutting interest rates, which also adds to demand in the economy.

Looking to budget 2026, if the economy continues to perform well, spending growth, net of tax changes, should be no faster than the sustainable growth rate of the economy. That is not to say the Government cannot try to improve public services, support households that are struggling or upgrade Ireland's infrastructure, but it means that choices would need to be made. If the Government wants to spend more in a certain area, or tax less in another, it needs to offset that by doing less in other areas. If the economy does suffer a significant downturn, a different strategy is required. In that case, budgetary policy should provide assistance.

One of the key themes of our report highlights the need for planning and medium-term budgeting. We anticipate significant spending overruns again this year. This is because spending overruns from last year were not taken into account when budgeting for 2025. This has been a repeated issue in recent years. So far this year, the first five months show spending overruns in many different areas. We estimate that current spending overruns of €2 billion are likely for this year. Expected overruns for this year need to be incorporated into expenditure forecasts for 2026.

Forecasts in the annual progress report only cover this year and next. They represent the bare minimum to meet legal requirements. In contrast, budget 2025 had five-year-ahead fiscal forecasts so this shift marks a clear backsliding on previous practice. Good planning and medium-term budgeting require forecasts that go more than 20 months ahead. The council has consistently stressed the need for budgetary forecasts that go at least five years ahead. The absence of medium-term budgetary forecasts shows that the Government has no fully realised medium-term budgetary strategy. By having such a short forecast horizon, the fiscal challenges from an ageing population and climate change cannot be adequately reflected in budgetary forecasts.

There is no effective framework for fiscal policy at present. The European fiscal rules do not work well for Ireland. They rely on GDP and ignore the risks linked to corporation tax. As a result, Ireland is unlikely to face external scrutiny at an EU level. This means a domestic fiscal framework is important, yet it remains weak. The Government is yet to propose a clear plan for a domestic fiscal rule. This means there is no formal guide for budgetary policy.

There are three key challenges the Government is facing. First, an ageing population will lead to higher spending on pensions, healthcare and long-term care. The Government has taken two steps to prepare for an ageing population. It has established the Future Ireland Fund. The council welcomes this and it should help to offset some of the future costs of ageing. The Government has also planned gradual increases in PRSI, to help fund increased spending needs. Second, the climate transition will need to be managed. There will be budgetary implications, with higher spending required to facilitate the transition. Some revenues will also need to be replaced as we move away from fossil fuels, which are quite heavily taxed at present. However, doing nothing would be extremely costly. If Ireland fails to reduce its emissions, as it currently looks set to by a wide margin, we may have to transfer an enormous amount of money to neighbouring countries. Third, Ireland’s infrastructure is approximately 25% behind its peers. Regardless of what happens to the international environment, these infrastructure deficits need to be addressed. If the economy weathers the changing environment, it will have high levels of employment and high demand for infrastructure. If there is some form of downturn, having adequate infrastructure would be key to restoring low unemployment and a prosperous society.

To conclude, let me highlight four key recommendations the Council makes. First, the Government needs to ensure budgetary policy reduces the ups and downs of the economic cycle. This means showing restraint when the economy is strong and being more generous when the economy is struggling. Second, the Government needs to set some limits on spending net of tax changes that it thinks are sustainable. Otherwise, budgets will, yet again, be subject to the vagaries of annual pressures as budget day approaches. The new Government is yet to outline any concrete proposals in this regard. Third, the Government needs to focus on competitiveness and infrastructure. While there is uncertainty over many issues, the shortage of infrastructure will need to be addressed regardless of what the international environment looks like. Fourth, the Government needs to improve how it forecasts spending. When formulating budget 2025, the Department did not account for the money it was going to overspend in 2024 when planning for 2025. This created unrealistic budget figures from the beginning - a problem that keeps recurring. To avoid repeating this mistake, budget 2026 and future medium-term plans must start with accurate baseline figures that include all likely overspends in 2025. Otherwise, spending projections will be wrong from the outset.

I thank the members for their attention. We remain committed to assisting the Oireachtas in achieving fiscal responsibility and economic stability and look forward to the members' questions and the discussion.