In its latest report, the Irish Fiscal Advisory Council has said the economy is continuing to recover with domestic demand returning to pre-pandemic levels.
The Fiscal Assessment Report credited vaccinations and the easing of restrictions for the economic bounce back. However, sectors with below-average wages, such as tourism and hospitality, remain well below pre-pandemic trends.
It is expected that possible further Covid-19 restrictions, risks to foreign direct investment from international tax developments, and continued uncertainties around Brexit could impact medium-term economic growth.
The Budget forecasts the economic deficit will narrow sharply to 5.9 per cent of national income in 2021.
For next year, the Budget forecasts a deficit of 3.4 per cent of gross national income, relying on further expected recovery in revenues and lower allocations for Covid-related spending.
According to the advisory group, the decision by Government to stick to its planned €4.7 billion budgetary package for 2022 "strikes an appropriate balance between supporting the economy and keeping the public finances on a sustainable path".
"For the medium term, Budget 2022 presents a clearer strategy than past budgets," the report said.
A number of budgetary measures such as new “5 per cent spending rule”, spending forecasts based on maintaining “existing level of services”, and the updated capital plan were all welcome initiatives.
However, the Fiscal Council said that the current budgetary strategy could be improved by setting spending ceilings for each Government department as legally required.
It suggested that the 5 per cent spending rule could be linked more closely to the domestic fiscal rules, expanded to cover non-exchequer spending and tax changes, and given legal backing.
Clarification on health and climate
Despite welcome improvements to the budgetary strategy, the Fiscal Council raised concerns about major Government projects.
According to the advisory group, it is unclear how the Government's commitments on health and climate fit into the medium-term spending strategy.
Highlighting one of the more politically contentious issues, the Fiscal Council noted that the costs of Slaintécare have not been updated since 2017.
Furthermore, it raised the issue of the Government having no estimated budgetary costs for implementing the recently announced Climate Action Plan.
"While a substantial part of the National Development Plan’s capital spending could contribute to these objectives, there may be significant additional costs to the State, particularly in encouraging the switch to electric vehicles and improving home energy efficiency," the report noted.
According to the Fiscal Council, room for manoeuvring on these projects is tight as the spending plans only allow for an average of €0.5 to €1.5 billion of additional current spending each year without raising taxes or cutting spending in other areas.
Speaking about the latest report, the Chairperson of the Fiscal Council, Sebastian Barnes, said the Government does need to clarify these costs.
“The Government has set out a more credible strategy. By sticking to its plans, this would deliver both higher investment and allow the debt ratio to fall to safer levels.
“However, the Government now needs to clarify the costs of Sláintecare and the new Climate Action Plan and how these will be funded sustainably,” he added.
“The over-reliance on corporation tax needs to be addressed.”
The ageing Irish population was another challenge highlighted in the fiscal report. According to the advisory group, this will put pressure on pensions and healthcare costs.
It called on the Government to set out a response to the preferred package of reforms set out by the Commission on Pensions as well as recommendations to postpone increases in the pension age and imply a significant increase in PRSI contributions.
"While legitimate, this option raises questions about the willingness of governments to impose these measures," the report said.
"Setting out a plan to phase in any PRSI increases over the coming years could make these measure more credible."