Mr. Seamus Coffey:

I thank the Chair and members of the committee for inviting us to appear. We value these engagements and see them as integral to our work. As we know, the fiscal council is responsible for providing an honest and independent assessment of how the Government is managing the public finances and the economy. Ahead of each budget, we produce a report setting out our views on the Government’s plans. We published our report two weeks ago and this is what we will speak to today.

In our report, we made two warnings. First, we warn that the Government is adding to price pressures by breaching its own tax and spending rule. Drawing on Central Bank research, we noted that the Government is likely to have added €1,000 to the average household bill by breaching its rule. The Government might put money back in people’s pockets but by raising prices, these indirect costs take out of their pockets in a lasting way.

Many note that inflation has fallen below 2% and this is thanks to falling energy costs in particular. However, prices remain high and there are still many areas seeing fast price increases. We can see continued pressure on areas such as rents, medical services costs and prices in hospitality, cafés and restaurants. These are things Ireland does not import and the pressures are now similar to what we would have seen in the 2000s.

This pressure comes at a time when Ireland is posting record job numbers. Employment is at record rates. Some 84% of those aged 25 to 54 are in work. The highest Ireland achieved historically was previously around 79% in the pre-financial crisis era. Reflecting working shortages, wages are finally starting to outpace price increases and this is providing relief to households after years of high costs.

By expanding in all areas of its budget - “everything now” - the Government is not making choices and it is not lessening these pressures. Tax cuts, higher day-to-day spending and a continued ramp-up in capital plans are all in prospect for budget 2025. The Government’s budget package is already large and overruns and untargeted cost-of-living measures will add further to the pressure.

The second warning the council made is that the Government might have to reverse some of its promises later on. The reason for this is that the boasts of a surplus are misguided. Ireland’s surplus is entirely driven by taxes from a handful of foreign multinationals. Without these, Ireland would be facing a large and growing deficit. To take 2025 as an example, the Government expects a surplus of €6 billion next year, but corporation tax receipts are driving this and they are incredibly concentrated. The windfalls are estimated to be close to €11.5 billion. As an example, let us remember that we collected about €10 billion from as few as three companies in 2022. If the windfalls were to suddenly disappear, we would be left with a deficit of over €5 billion, and if employment rates went back to more normal levels, this could push the deficit to almost €10 billion as taxes on incomes fall and jobseeker payments rise. That is about the size of our annual spend on primary and secondary schools.

What is the risk? The risk is that the Government might be forced to renege on its promises if things changed suddenly, for example, if corporation tax revenues suddenly shrank or if exceptional job numbers reversed. A reversal like this could come at a time when the economy most needs support. In leaving Ireland more poorly placed to fight the next recession and prevent job losses, we believe this would repeat Ireland’s past mistakes.

Ireland’s economic engine is running fast and certain parts are struggling to keep up. We are struggling to build as much housing as is needed and other areas, such as energy, water, and transport, are also struggling. Some argue that we just need to be more radical or ambitious. It is fine to be more ambitious but if that means throwing more money at these problems, we will probably not be able to produce more with that extra money. We are limited by the number of workers we have, for instance, but also by the ability of the planning system and authorities to absorb new demands. In just throwing more money at this, we are likely to make some problems worse, driving up prices for everyone and getting bad value for money. Ireland is already grappling with high costs. Pushing things further in this direction could harm our engine of growth - our exporters - making it less attractive to bring new jobs here.

Our view is that the Government first needs to stick to its own rule. This will help to keep living costs down for households and it will also help to avoid needless job losses in the next downturn. As for infrastructure deficits, the Government needs to look beyond just providing more money. There are ways to unblock delivery and enable better outcomes. There are hopes that the Planning and Development Bill will deliver on this front. The Government can also look at ways to encourage the private sector, which includes giving private investors more certainty and more incentive to play their part.

Another option is to focus on areas that require fewer workers. In our report, we give one example relating to the green transition. A substantial portion of spending will ultimately have to fall on imports of electric vehicles to meet targets and this relies more on financial incentives and providing charging infrastructure. By contrast, retrofitting targets need a substantial amount of direct worker involvement. This approach would lessen the draw on domestic resources, such as construction workers, and it would avoid aggravating price pressures. Let us remember that not meeting targets could lead to non-compliance costs as high as €8 billion. This is money that would be more usefully invested in the Irish economy.

I will conclude by noting that the fiscal council was set up to help Ireland learn from its past mistakes. If we are to learn from those past mistakes, we need the Government to start sticking to its own rule. This can help us to avoid adding to pressures today and it would avoid the need to have to hit reverse later, potentially in the next recession.