Watchdog calls on State to set out ‘credible’ finance plan

THE State’s budget watchdog has warned there isn’t a credible plan for prudent management of the public finances over the coming years.

The Fiscal Advisory Council said the Government needs to set out a plan for the medium term so that a procyclical pattern of budgetary increases does not occur in a repeat of the past that has led to a cycle of boom and bust.

In its assessment of Budget 2018, the council said a “lack of clarity” means the plans for the coming years could be undermined.

“The Government should set out a credible plan for the medium term,” said Fiscal Council chairman Seamus Coffey, pictured.

“Yes, we have medium-term projections, but they aren’t really anchored to anything. There isn’t really a credible plan set out that avoids some of the procyclical pattern of budgetary increases that we have seen previously.”

Mr Coffey said the Government should make a firmer commitment to spending limits laid down by the European Commission, as well as strengthening the proposed ‘rainy day fund’.

The council said the fund could serve as a useful tool to ensure more sustainable growth and prudent management of the public finances.

“However, the current proposal is not adequate to achieve the necessary countercyclical effects and is small in size,” the council said.

The council also argued that the Government must adhere to a target for public investment spending over the medium term.

And it warned that runaway house building could again overheat the economy in future – if the danger is not taken into account.

“There is a potential risk that the economy may experience overheating in the coming years,” said Mr Coffey.

“The economy has grown quite rapidly, perhaps above its potential for the last three to four years, and we are close to reaching potential. If there is a rapid expansion in the construction sector, it could lead to a situation where the economy outperforms its potential. There may be need for counter cyclical measures elsewhere.”

The council also said that given the risk of overheating and the fact that the Budget plans are consistent with ramping up capital spending, meeting demographic and price pressures, it would be “wise” to decide to start spending more over the coming years.

A better use of extra revenue, such as better than expected corporation tax receipts, should be put into the Rainy Day Fund, or used to pay down Ireland’s still high public debt pile.

Mr Coffey also warned that corporation tax receipts are at unprecedented levels and that it is the most volatile of tax revenue.

He said caution should be exercised in thinking that this form of revenue may be permanent. The council also warned that the impact of Brexit is highly uncertain, as is the timing of its economic effects.

It said these effects could be more negative than currently forecast, particularly if the impact is front loaded.

It also noted potential changes to tax arrangements both at OECD level, and in

the US.