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The Irish Tax Council strongly criticized the 2019 budget, saying that spending growth exceeded the security threshold, leaving the country exposed to a further slowdown.
He said the budget was not a prudent economic or fiscal management, and warned that an economic slowdown in the coming years is inevitable.
If spending increases faster than revenue, the fiscal position deteriorates. the government will miss the budget targets and there will likely be other unforeseen increases in spending in the new year, said the council.
Accusing the government of repeating the political mistakes of the past that led to an expansion-recession cycle, he said repeated failures to prevent unplanned spending increases – especially in the health sector – expose public finances to economic shocks.
By spending all available resources now, helping to fuel a booming economy, the government has little leeway to revive the economy when it needs it most, which is a slowdown.
IFAC said the government has failed to improve the underlying fiscal position over the past three years, despite very favorable conditions.
He rejects the government's medium-term fiscal plans, which are not credible, and warns that the country is closer to recession than the last recession.
The council – an independent body overseeing the budget – said: "Prudent fiscal policy would see net spending increase in line with sustainable revenues.
"But the 2019 budget plans indicate an increase in government spending (excluding tax measures) of 4.5 billion euros in 2019 compared to what was planned for 2018.
"The council considers that this does not favor a prudent economic and budgetary management".
Describing "substantial" extra-budgetary increase for 2019, IFAC said it exceeded the limit of 3.5 billion euros previously advised by the council, as appropriate, on the basis of sustainable growth rates.
The report identifies a major gap, namely the 700 million euro overspend on health this year, which the government will cover with an additional budget.
These additional expenses – unplanned and unbudgeted and described as "reckless" by the IFAC – in 2018, fuel the starting point of the health budget for next year, which leads to spending increases higher than expected.
The report says: "The largest increase mainly reflects the fact that the 2019 budget plans are based on the reckless increase in spending in 2018. The overall increases also go beyond previously established government plans. to the budget.
"With the base now higher for 2018, the underlying increase in total spending (excluding tax measures) from 2018 to 2019 is currently € 1.4 billion above the forecast in the Stability Program ( SPU) 2018.
"The estimates of the Ministry of Finance in the budget suggested that the government's plans would contravene the 2018 and 2019 budget rules."
Cycle boom and recession ready to repeat itself?
Report of the Irish Tax Council
In a harsh criticism, the report states: "Repeated failures to prevent increases in unbudgeted spending during the year have further exposed public finances to negative shocks, and these failures also mean that the budget balance remains in deficit and not surplus ".
To show the impact of spending overruns, IFAC said that without excessive spending on health (or using additional revenue measures to fund them), public finances would have become surplus two years ago.
The report states: "Failures in preventing unexpected spending increases have resulted in long-term increases that are difficult to reverse, and these increases are a repetition of past policy mistakes.
"Instead, pressures in the health sector and elsewhere should be funded through sustainable tax revenues or by reducing spending categories elsewhere."
The report also indicates that the magnitude of spending overruns has been masked by unexpected increases in corporate tax revenues every year since 2015.
These unforeseen revenues were spent to cover the increases in expenditures.
But the council is questioning the sustainability of these revenues. If it were to start declining as a result of a recession or some other form of economic shock – such as changes in the international fiscal environment – permanent spending increases relying on these revenues will weigh heavily on public finances.
This could force the government to raise taxes or cut expenses to compensate – by taking money out of the economy at the wrong time.
This is why IFAC describes the budget plan as "not conducive to prudent economic and fiscal management".
Beyond the 2019 budget, the council said the medium-term government's budget plans were "not credible".
The intentions to achieve surpluses are described as "vague", the medium-term spending plans are "unrealistic" and the commitments made previously to surpbad the fiscal rules and reduce the debt to 55% of GDP have been abandoned.
Although the short-term outlook for the Irish economy remains strong, a slowdown in the coming years is inevitable.
The council said the conditions of the Irish economy could change very quickly – Brexit remains a major risk to the economy in the coming months.
The economy has been growing strongly for the past five years, mainly due to a cyclical recovery in demand. But the economy seems to be running almost at its potential level, with a possibility of overheating in the coming years.
This is particularly the case if there is a stronger than expected recovery in short-term housing production.
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