The Irish Fiscal Advisory Council (IFAC) said high corporation taxes “should not be relied upon to fund permanent increases in spending”.
The government confirmed on Monday that it was to deliver a much bigger budget ahead of schedule with a series of one-off measures to tackle the cost of living crisis.
The 2023 budget, due two weeks ahead of schedule on September 27, will involve a €6.7 billion spending and tax package to be announced the same day, an increase of €1.7 billion. euros compared to previous plans.
The fiscal watchdog issued a series of tweets following the release of the Summer Economic Statement. IFAC said the 2023 budget “involves a delicate balancing act to protect the economy and poorer households, while avoiding worsening inflation through second-round effects.”
He said “overreliance on corporation tax should be reduced through contributions to the Rainy Day Fund or a new pension reserve fund” and he warned that “uncertainty about the economy remains very high”.
On Tuesday, IFAC Chairman Sebastian Barnes said the government had managed to strike a reasonable balance in the summer economic statement between supporting the economy and helping the most vulnerable.
However, Mr Barnes warned that most government spending so far had not been targeted. The balance could be better and it is important that the budget be more targeted.
Long-term issues such as overreliance on corporation tax must be addressed at some point, he said.
Next year, spending will increase by 6.5%, breaking the government’s 5% spending rule. The spending rule was fine, Mr Barnes told RTÉ radio’s Morning Ireland, but these were circumstantial circumstances so it didn’t make sense to stick to the 5% rule.
Planned spending of 6.5% “is nowhere near chasing inflation to 9%,” he said. The overheating economy was a risk with pressure on rents and global factors, Mr Barnes said.
A series of one-off measures, likely made up largely of social protection payments, will also be announced in the budget. No indication has been given as to the size of this financial envelope, but it is understood that it should amount to hundreds of millions of euros.
Finance Minister Paschal Donohoe and Public Spending Minister Michael McGrath reportedly resisted demands from their colleagues to commit to bigger spending increases as the Treasury posted a surplus of more than 4 billion euros for the first semester of the year.
Cabinet has been warned that windfall corporate tax revenues cannot continue and that it would be unwise to embed recurring spending commitments on the back of what could be windfall revenues which will decline in years coming.
At a news conference after the Cabinet approved the statement – which sets the parameters for the budget and is one of the year’s key fiscal and economic documents – Mr Donohoe said tax revenue on the companies were “highly concentrated” in a small number of companies and can be “volatile”.
He suggested that the surge in corporation tax receipts this year, which saw the Treasury take in €8.8bn, could present an “artificially positive” picture of public finances, and said he there were signs of slowing economic momentum.
Ministers confirmed the budget would take place on September 27, but have resisted calls from colleagues and the opposition in recent weeks to present an emergency budget this month.
As part of the strategy set out in the statement, €1.05 billion will be set aside on Budget Day to pay for tax measures, double the amount previously planned. Much of this money is expected to be used to raise tax brackets and thresholds to offset the effects of inflation.
There will be 2.7 billion euros for further spending increases in various ministries that ministers will haggle over in the coming months. However, a large part of this amount will be absorbed by increases in social benefits and pensions, as well as the cost of any new public sector wage agreements.
Unions representing public sector workers have already turned down an offer of 5% over the next 18 months, the cost of which amounted to 1.2 billion euros.
Some €400 million of the €2.7 billion figure has been earmarked for spending measures that could come into effect before the end of this year, which could include increases in social protection and elements of a public sector wage agreement that begins this year.
An additional €3 billion will be used to cover additional expenditure to respond to demographic changes, the national development plan and existing public sector wage commitments.
Mr Donohoe said that while public finances were strong and the economic recovery since the pandemic had been robust, the outlook for the future was increasingly threatening. He cited the war in Ukraine, rising interest rates and persistent inflation as threats.
“A higher cost of financing, coupled with high debt levels, means that tax and spending policies cannot be used to solve all problems. Tough choices will have to be made and the government will not avoid that,” said the Summer Economic Statement.