The budgetary watchdog, the Irish Fiscal Advisory Council (IFAC), has urged the Government to revise its plans for the upcoming Budget and stick to its own National Spending Rule.
In its pre-Budget statement, IFAC described planned increases in spending and tax cuts as "particularly ill-advised" that will add to inflation and wage pressures.
IFAC has calculated that under plans laid out in the Government's Summer Economic Statement, expenditure will breach the National Spending Rule in each of the next three Budgets.
By 2026, it believes core spending will be €4bn higher than previously planned.
It is a breach described as "serious" and one that "weakens the credibility of Government projections" and "casts serious doubts over the integrity of Ireland’s fiscal framework".
The Cabinet has signalled that it will stick to its budgetary plans, despite criticism from IFAC.
Speaking before Cabinet, the Taoiseach said that the National Spending Rule needed to be breached at a time when inflation was running at around 5%.
Leo Varadkar said he did not agree with IFAC's contention that the Government was in danger of repeating the mistakes of the past.
Finance Minister Michael McGrath argued that the Coalition was being "prudent" and getting the "balance right" in its plans for Budget 2024.
He argued that the rate of inflation means that the Government has to "adapt" its policy, including breaking the spending rule.
Public Expenditure Minister Paschal Donohoe said the Cabinet is "absolutely aware of the risks" facing the economy, and has learned the lessons from the past.
IFAC was particularly critical of how extra capital expenditure from windfall corporation tax is accounted for and said getting value for money will be "challenging" at a time when the economy is "beyond full employment".
It warned that pumping more money into the economy through higher core spending and more one-off payments risks pushing inflation higher and repeating the mistakes of the past.
It warns that health, housing, infrastructure and climate change costs will all need to be funded into the future and that this cannot be done on the basis of temporary windfalls in corporation tax.
IFAC believes that an overrun in health spending this year of between €500m and €1bn is "feasible".
It said the Christmas social welfare bonus, of approximately €350m, should be counted when spending plans are drawn up as it has been paid every year since 2018 and paid in part since 2014, but it is only announced on Budget Day.
It calculates that plans for core spending increases of €5.2bn next year need to be pared back by €900m to ensure the rule of a 5% nominal net increase in core spending is maintained.
It points out that the spending rule is structured in such a way that in times of high inflation, governments face tougher choices to keep paying for existing services.
In this way, the rule constrains public expenditure at times when the economy does not need any extra money being pumped in.
IFAC has calculated the pace of core net spending at 6% next year, 5.2% in 2025 and 5.5% in 2026.
It also said the rationale for an investment fund to come out of windfall corporation tax receipts is "weak" and that the existing National Development Plan should be the framework for identifying capital investment needs over the longer term.
It repeats a warning that "long-signaled" costs from climate change have yet to be quantified by government and built into budgetary plans.
The acting chairperson of the Irish Fiscal Advisory Council has urged the Government to use budget 2024 to "break with a tendency to be procyclical".
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Speaking on Morning Ireland, Michael McMahon explained this means a tendency to spend when things are good economically and cut back when they are not.
Mr McMahon said the Irish economy is in a very strong position, despite the challenges of the last number of years.
"By our assessment, it's beyond full employment. And as such, it is not an economy that requires a big additional stimulus through a large budgetary package," he stated.
He said the Government should make tough choices and stick to the national spending rule, but added that the Summer Economic Statement did not appear to support this idea.
Michael McMahon said there is a risk that the Government will add to inflationary pressures if it follows this plan.
But he said the IFAC welcomed proposals on the spending vehicle that will pay for future projects like pensions and state investment projects.
There are still details to work out, he added, but that investment in certain areas can all be achieved within the national spending rule.
Chief economist with Goodbody, Dermot O'Leary, said the warnings, scrutiny and analysis from IFAC is very important and that critique of government wasn't there in the past.
However, he said the scale of breach of the spending rule, projected to be just over 6% next year, is quite small in the scheme of things.
He said the reasons for the breach are also compelling. "Ireland will suffer into the future if it does not address its infrastructure deficits in terms of housing in particular and also energy.
"There are reasons why we think spending should be put to capital purposes, and indeed, and I disagree with the Irish Fiscal Advisory Council again on this, I think there is a reason why we should have a capital spending stabilisation fund as part of planning for the next number of years," Mr O'Leary said.
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