The Fiscal Advisory Council says the public finances are in good shape, but action may be needed to keep them in line over the medium-term, including possible tax rises to cool down the effects of a rapid rise in house-building.
In its post-Budget assessment, the Fiscal Council says the 2018 Budget plan has allowed for a gradual pace of debt reduction, a moderate increase in current spending and a big ramping up of capital investment to levels that will be among the highest in the EU.
And it will do all this whilst complying with the fiscal rules.
But the council would like to see a firmer medium-term plan that will limit spending increases, and stick to planned capital investments even during a downturn, so as to keep the public finances in order.
To avoid overheating risks from an economy that is close to operating at full potential - especially from an increase in house-building - it says the Government should be prepared to take some money out of the economy, either by raising taxes to pay down more debt, or diverting more money into the 'Rainy Day Fund', to be used to support the economy during a downturn.
It assesses the Government’s fiscal stance in Budget 2018 as "conducive to prudent economic and budgetary management".
It says the Budget increased spending at a faster pace than allowed under Irish and EU fiscal rules, but raised taxes to bring the spending rise back into conformity with the rules.
This kept the Budget within the spending plans announced in the Summer Economic Statement, which said the Budget would stay within the gross fiscal space of €1.7 billion.
To keep the public finances on the right track - and in particular to avoid the previous patterns of rapid spending increases funded by unsustainable revenues, followed by sharp cutbacks during a downturn (particularly in capital spending) - IRAC says the Government should set out what it calls a credible plan for the medium-term to prevent pro-cyclical spending.
It says solutions include:
- making a firmer commitment to the spending rule (the 'Expenditure Benchmark', which limits spending rises to the rate of economic growth), even when the Budget structural balance target has been met.
- fleshing out the design of the proposed 'Rainy Day Fund' so that it can become a genuine counter cyclical instrument, and is big enough to make an impact. (the current plan it to build up the fund to €3bn by 2021).
- The Department of Finance should segment its "toolkit" - or range of economic measures - used to assess the cyclical position of the economy.
This would, says IFAC, improve the information used by the Government in making economic decisions, which should help in trying to avoid pro-cyclical policies by not increasing or cutting spending at the wrong time.
The council also said the Government should sticking to a target for capital spending over the medium term.
This would avoid the stop start nature of capital investment in Ireland (making projects cheaper) and would smooth out spending, using the Budget as a stabilising force in the economy, rather than an amplifier of booms and busts.
The council says these measures "should help alleviate known measurement issues and prevent an excessively expansionary fiscal stance from being followed as in previous cyclical upswings.
It would also allow the Government to reduce high debt levels at an appropriate pace, and to build up buffers against future shocks.
It thinks Brexit is the most obvious potential shock in the medium term, and says the impact of Brexit may be more severe at the beginning ("front loaded") than most existing forecasts assume.
Changes to the international tax regime - particularly in the US or the EU - could impact on the corporation tax take - with just ten big companies accounting for two fifths of the corporation tax revenues in 2016.
And it warns of inappropriate monetary policy. It says while the Irish economy is expected to grow at a much faster pace than the Euro area, there is a risk that ECB interest rates will be much lower than would be regarded as optimal for Ireland.