Loose government budgeting stance raised as a concern by ESRI
In a recent appearance before the Oireachtas Committee on Budgetary Oversight, research professor Alan Barrett of the Economic and Social Research Institute (ESRI) raised concerns about Ireland's current fiscal policy. Mr. Barrett highlighted the vulnerability in the tax base and the risks of overheating, emphasizing the need for a countercyclical budgetary stance.
Mr. Barrett's comments come amid an acceleration in Government spending over and above what was announced in last year's budget. He expressed concern about overheating risks due to the current fiscal policy, not just in terms of inflationary pressures, but also capacity constraints that could hamper the delivery of the National Development Plan and national housing targets.
The ESRI's warning echoes similar ones from the Central Bank and the Irish Fiscal Advisory Council (Ifac). Ifac chairman Seamus Coffey stated that government spending is faster than the sustainable growth rate of the economy. He also recommended a more modest budget package than what is currently planned, emphasizing the need for sound fiscal management to move to the fore again in Budget 2026, including adherence to announced spending plans throughout the year.
The Government's proposed €9.4 billion budget for next year is said to add momentum to an economy already running close to its 'potential output'. However, Mr. Barrett pointed out that the last few years have provided circumstances where loose fiscal policy was warranted due to factors like the Covid-19 pandemic and cost of living crisis related to Ukraine. History, particularly the economic collapse, provides a stark reminder of this, according to Mr. Barrett.
In response to these concerns, the Government is focusing on social spending. For instance, the 2026 budget in Lower Saxony plans record social spending of 8.57 billion euros, focusing on social affairs, work, health, and equality. The federal government is also investing around 3.8 billion euros to expand and modernize daycare services for children, recognizing the ongoing demand despite declining birth rates, thus indirectly supporting young families by improving early childhood education and care.
Additionally, there is a program called 'Akti(F) Plus' supporting families and children at risk of social exclusion with project funding up to 2.25 million euros, aiming at improving social participation and life conditions for young families. However, Mr. Barrett suggested that the Government's budgetary stance should be countercyclical, running against the prevailing economic trends, to mitigate the risks of overheating.
Overruns in day-to-day spending are expected to top €2.5 billion this year as a result of greater-than-expected spending across several departments. This underscores the fragility of Ireland's budgetary position, which is heavily reliant on windfall tax revenues from corporate tax. Mr. Barrett emphasized the importance of addressing Ireland's infrastructural shortfall, highlighting the need to fund substantial capital expenditure to deliver on the National Development Plan and national housing targets.
In conclusion, while the Government's proposed budget aims to support the economy and various social groups, experts like Mr. Barrett and the ESRI are cautioning against a loose fiscal policy that could lead to overheating and capacity constraints. The focus should shift towards a countercyclical budgetary stance to ensure sustainable growth and delivery of long-term infrastructure projects.
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