Mr. Sebastian Barnes:

The council would like to thank the Chair and members of the committee for inviting us to discuss the council’s November fiscal assessment report. We very much value our engagements with the Oireachtas and see these as important opportunities in the context of our work. Joining me are council members, Dr. Adele Bergin, Mr. Alessandro Giustiniani, Professor Michael McMahon, Dr. Eddie Casey, our chief economist, and Ms Dawn Holland.

The council is an independent body established under the Fiscal Responsibility Act 2012. Its mandate is to endorse and assess the Government’s official economic forecasts, assess its budgetary projections, monitor the fiscal rules and assess the Government’s overall fiscal stance.

Ireland’s growth has slowed considerably over the past months. The rapid post-Covid recovery has been stunted by surging prices, mainly for energy and food. This has led to weaker real incomes. While the jobs market remains exceptionally tight, it shows some signs of softening, including in digital sectors. Budget 2023 forecasts real GNI* growth of just 0.4% in 2023 before returning to more normal rates of about 3% in 2024 and 2025.

There are major risks to these projections. Gas shortages this winter seem less likely than they did earlier in the year, but many challenges remain around energy. There is a slowdown in Ireland’s main trading partners, which could be on the verge of a recession. If high prices pass through to wages, it could mean more persistent high inflation, weakening growth further. Housing supply pressures continue to be an important challenge, though household and corporate debt are lower than a decade ago, providing some resilience.

Budget 2023 involved a large package of measures amounting to €11 billion for next year. Of this, some €7 billion is for permanent measures, with €5.8 billion related to spending and around €1 billion to tax. A further €3.9 billion is in the form of temporary measures aimed at helping households and businesses adjust to the rising cost of living. The council’s assessment is that budget 2023 struck an appropriate balance between, on the one hand, supporting vulnerable households and, on the other, avoiding adding to inflationary pressures. The temporary deviation from the 5% spending rule is relatively limited, with core spending rising by 6.8% in 2023. The council assesses that the permanent spending increases in both years are likely to be sustainable. These increases do not compensate for inflation in full, but the gap for lower income households in 2023 is more than made up for by substantial temporary supports.

The Government made an important change in its presentation of the budget this year by introducing a new measure of the budget balance that excludes an estimate of excess corporate tax receipts. This measure, recommended by the council in previous reports, provides a clearer picture of the underlying state of the public finances and is likely to be more robust. On this basis, the budget deficit was forecast to narrow substantially to 3% this year. This reflects the lifting of pandemic supports and strong revenue growth. The budget balance, notably taxes, could ultimately be more favourable than forecast for this year.

Following a further improvement in the budget balance in 2023, a budget surplus of 1% to 2% of GNI* is projected by 2025 when excess corporation tax is excluded. This assumes that the Government sticks to its 5% spending rule as planned. However, we estimate that current spending increases in 2024 and 2025 under those plans would not fully accommodate demographic or price pressures, falling short by €800 million per year on average. This implies that there is no space for additional spending without finding offsetting resources elsewhere.

There is now a window of opportunity for Ireland to reduce its debt burden to safer levels while interest costs remain low, despite recent rate rises. Future shocks to interest rates, growth or debt will be more manageable if we start from a lower level of debt than the one we currently have. Sticking to its plans, the Government could see its net debt ratio fall from 73% at the end of this year to around 58% of GNI* by 2025 on the back of budget surpluses, relatively high inflation and moderate growth. This would provide a buffer to help the Government respond to future recessions or crises in the way it has in recent years. However, this window of opportunity is likely to be short-lived.

The public finances face major long-term challenges, including pensions and the ageing of the population, the costs of climate transition and the need to reduce overreliance on excess corporation tax receipts. The decision to maintain the pension age at 66 adds to future tax pressures. The Government needs to step up its long-term planning about how these challenges will be addressed. The council is concerned that in budget 2023, the forecasts again only go three years ahead. This does not allow for a proper analysis of the medium-term path for the economy or assessment of the Government’s fiscal plans, including how to address medium-term pressures. The Government should return to medium-term forecasting on at least a five-year-ahead basis. To support planning, the Government should make three changes. First, it should reinforce its 5% spending rule. This has proven to be a simple and effective anchor for the public finances. The spending rule should be put on a legislative basis, net out tax changes, be linked to debt targets and capture the full range of general Government spending. Second, the Government should make use of medium-term spending ceilings at the departmental level, as required by law, to anchor the spending rule across government. Third, it should rethink the national reserve fund. The Government’s decision to restore the national reserve fund is welcome and an important step in the management of public finances. However, the Government should consider raising the cap and turning it into a new national pensions reserve fund, which could take pressure off tax increases in future years to fund known pension shortfalls.

While budget 2023 navigates a steady path through the energy crisis, Ireland’s bigger long-term challenges are becoming ever more urgent. Difficult choices will be required in the years ahead, including on how to manage ageing and climate change. This will have major implications for spending and taxation.