Govt debt could end up on ‘unsustainable path’ – IFAC
The Irish Fiscal Advisory Council has said the economy is recovering ‘swiftly’ but government spending plans for the upcoming Budget are “at the limit of what is prudent”.
In its pre-Budget Statement, published today, the budgetary watchdog also warns there is a one-in-four risk that government debt could end up on an unsustainable path.
The Fiscal Council welcomes the detail and rules on spending for the upcoming Budget outlined this summer by the Government.
However, it says that plans for considerable extra spending mark what it describes as ‘a major policy shift’ from what was outlined in the Programme for Government.
It says increasing spending, investment and cutting taxes all at the same time is a ‘risky strategy’ and does not “…leave the public finances on a sustainable footing.”
It notes that increased investment is necessary to solve problems like housing but it has concerns about the capacity in the economy to respond to higher levels of spending without triggering inflation.
It also warns that, historically, the management of public investment in Ireland has been weak.
One bright spot for the Government in IFAC’s report is its forecast for a lower deficit this year due to a faster recovery in the economy.
It believes the budget deficit will come in at €15.5 billion compared to current government forecasts of just over €20 billion due to the faster than expected recovery in the economy.
IFAC says the Government should take a more prudent approach over the next four years and prioritise between investment, spending and tax cuts.
It says by expanding all three, the Government “…is effectively evading difficult choices and slowing the return of debt ratios to safer levels…”
It goes on to calculate that based on current projections for growth in the economy, this will leave the public finances €2 billion short of the available fiscal resources.
This would not, IFAC warns, leave the public finances on a sustainable footing.
IFAC does commend the Government for introducing an expenditure rule but says it should be enshrined on a statutory basis to ensure it’s seen as binding.
The watchdog observes that the plan to run significant deficits out to 2025 is ‘unprecedented in Irish experience’ outside the years following the economic crash.
Based on its own calculations, it warns that even with low interest rates, there is a 25-30% risk that Ireland’s debt ratio as a result could become unsustainable.
The Chair of the Irish Fiscal Advisory Council says there are risks that the Irish economy will overheat, but it will not happen right now.
Sebastian Barnes said the the risk of overheating will not be a big issue in the short term but warned that it could happen down the line if the Government continues to expand on all fronts – expanding investment, cutting taxes and increasing day to day spending.
Mr Barnes told Morning Ireland that the Government is planning a much needed investment plan but it should be asked how this will be financed.
He added that the Government needs to make choices that they have avoided doing until now.
Mr Barnes said it is currently a good time to invest because interest rates are very low, but IFAC is concerned at the country’s current level of debt and this is why the Government needs to make choices between investment, cutting taxes and current spending.
In addition, the Council is concerned about capacity constraints, he added.
Mr Barnes pointed to the construction industry where, he said, building could be ramped up so fast. But the supply is not there and this could just lead to higher prices, he cautioned.