Economy on the road to overheating – watchdog

Government warned long-term spending plans ‘lack credibility’ and ‘look unrealistic’

THE economy is now close to its peak and is facing a number of risks that could cause it to crash, the country’s budgetary watchdog has warned.

Head of the Irish Fiscal Advisory Council, Seamus Coffey, will today say that Finance Minister Paschal Donohoe’s long-term spending plans “lack credibility” and “look unrealistic”.

As new figures show bumper corporation tax receipts for November, he will caution that the economy is “close to its potential”.

Mr Coffey, who will address the Oireachtas Budget Oversight Committee today, said forecasts suggested economic growth would “move beyond potential from 2019 onwards, with overheating emerging in later years”. He will also warn that predicting the economy’s performance in the coming years will be difficult.

He highlights a number of risks on the horizon – a more costly Brexit than assumed, and overheating in the housing market if construction picks up faster than expected.

His warning comes as foreign investors are being encouraged to cash in on our housing crisis.

The lack of homes and spiralling rents have helped to make Dublin the third-most attractive city in Europe for big property investors, according to accountants PwC. It came behind Lisbon and Berlin.

Rents have soared as a result of the shortage of housing, making it more expensive for individuals to rent or buy.

But that makes the city more attractive for big investment funds, who can get a bigger return as rents grow.

With supply in the capital continuing to lag behind demand, investors look set to do well for a number of years, says PwC.

The growth of big tech companies is adding to the demand for housing.

FINANCE Minister Paschal Donohoe’s long-term spending plans “lack credibility” and “look unrealistic”, the head of the country’s budgetary watchdog will warn today.

Amid new figures showing bumper corporation tax receipts for November, the Irish Fiscal Advisory Council (IFAC) will caution that the economy is “close to its potential”.

IFAC chairman Seamus Coffey will say today that central forecasts suggest growth will “move beyond potential from 2019 onwards, with overheating emerging in later years”.

He will add that while efforts to stabilise the public finances since the crisis have proved successful, “improvements on the budgetary front have stalled since 2015”.

Warning of the dangers ahead, Mr Coffey will tell the Oireachtas Budget Oversight Committee that recent revenue growth has been supported by “short-term cyclical developments and a possibly transient surge in corporation tax receipts”.

Exchequer returns released last night showed the corporation tax take in November was €681m ahead of target.

Department of Finance figures show overall taxation receipts last month were €938m higher than in the same month last year.

November is the month when most businesses pay their tax, making it a key point for budget arithmetic.

Mr Donohoe has decided to use a chunk of the additional income to fund an overrun, especially at the Department of Health.

Shortly before announcing Budget 2019, the Government decided to increase spending for this year by €1.1bn beyond what was envisaged just four months earlier.

Mr Coffey will say that while some variation from targets is inevitable, they should be funded through sustainable tax increases or reallocating of existing monies.

“The council assesses that the within-year spending increases this year are not consistent with prudent budgetary management,” he will say.

“The repeated failures to prevent unplanned spending increases have resulted in long-lasting increases in spending which are difficult to reverse. These failures represent a repeat of the policy mistakes of the past.”

Mr Coffey will also warn that predicting the economy’s performance in the years ahead will be very difficult.

Firstly, he cautioned that “overheating pressures could build up if a faster-than-expected pick-up in housing construction materialises”.

“On the other hand, Brexit could be more costly than assumed.”

Mr Coffey’s statement, seen by the Irish Independent, says there are also “risks posed by the concentration of Ireland’s exporting sector in a handful of specialised areas, the global rise in protectionism, and possible future changes in the international tax environment”.

Mr Donohoe has defended his budgetary policies saying he has acknowledged some of the increase in corporate tax receipts this year is due to one-off factors.

“For next year, my department has taken account of this and has projected a decline in corporation tax receipts for 2019; expenditure plans have been set on this basis,” he said.

The increase in corporation tax paid this year is due in part to one-off changes in global tax practice that mean around €700m of extra tax will be paid.