Budget row heats up as ESRI backs Government’s spending plan for next year

The Economic and Social Research Institute (ESRI) backed Finance Minister Michael McGrath against accusations of “bad budgeting” and overspending by his own budget watchdog, saying the economy will be able to absorb it without fuelling inflation, largely because of high growth.

However, in its quarterly economic commentary today, the ESRI is predicting a recession in 2023 – due to falling exports and lower foreign investment, with gross domestic product (GDP) set to dip by 2.7pc.

The forecast is more pessimistic than EU and OECD predictions, which also see a recession on the cards as a result of slowing multinational activity.

But ESRI research professor Kieran McQuinn said a still-buoyant jobs market and an uplift from the domestic economy means people here won’t feel the pinch.

“While, technically, a contraction in GDP is obviously a recession, the underlying performance of the economy is still strong,” he said ahead of the report’s release.

‘You have to look at these rules and question them’

Last week, the state budget watchdog, the Fiscal Council, accused the Department of Finance of “fiscal gimmickry” in a bid to evade its own 5pc spending limit that it said would add fuel to the fire of an overheating economy.

But Mr McQuinn defended the Government, saying the economy “has been growing faster” than its own spending rule allows for, and “sticking rigidly” to the rules was not the answer.

“You have to look at these rules and question them,” Mr McQuinn said.

“The danger is that if you underestimate the real underlying pace of growth in the economy, it means that you are underestimating the investment needs of the economy, and that’s the concern that we have.

“It really has taken quite some time for capital expenditure to increase. There are a number of areas, though, where you do need to prioritise – and, as we said before, housing is clearly one.”

However, he said the budget “probably would have benefitted from being somewhat more targeted in nature” and that it would be a “contributing factor” to its forecast of 2.9pc inflation next year.

And he said that the increased use of one-off or “non-core” budget lines in recent years, which was heavily criticised by the Fiscal Council, is something that needs to be addressed.

‘The gimmickry is the term used to describe the changing of definitions or the adjustment of measures’

Budget 2024 set out a package of almost €14bn, including a core spending and tax package of around €6.5bn, €2.8bn in cost-of-living supports (including energy credits and mortgage interest relief), €4.5bn in non-core measures for health and refugees, and €250m for “windfall investments” drawn from excess corporation tax receipts.

Fiscal Council acting chair Michael McMahon doubled down on his “fiscal gimmickry” accusations at a Dáil committee yesterday.

He said the watchdog was not telling the Government to pull back on necessary investments in housing, health or cost-of-living supports, but said the Department of Finance should stop “moving numbers around”.

“We are not arguing that there is no need for extra spending,” said Mr McMahon. “The gimmickry is the term used to describe the changing of definitions or the adjustment of measures in order to make your fiscal position look more favourable than it is.

He said the Government was not “intervening carefully” with the package, which will act as a “stimulus” to the economy and could work against the European Central Bank’s efforts to tame inflation.

Meanwhile, although GDP is set to contract this year, the ESRI believes it will recover next year to 2.3pc.

Thanks to wage hikes and falling energy prices, inflation stopped eating into pay packets at the end of this year, the ESRI said.

An increase in computer services exports, despite a global tech downturn, has partly offset a recent decrease in sales of medical and pharmaceutical goods, making for a more upbeat assessment, the economic commentary said.

Modified domestic demand, which strips out the effects of patents and aircraft leasing, is set to slow sharply, from almost 10pc last year to 0.6pc this year, before recovering to 2pc next year.

Inflation is set to ease from almost 8pc last year to 6.4pc this year and 2.9pc next year.

Unemployment is set to continue falling from 4.4pc this year to 4.3pc next year.

A slight uptick in the number of people on the unemployment register this year is down to a technical issue with Ukrainian refugees being added to the list, the ESRI noted.

The economy is still in rude health thanks to growing tax receipts, with a surplus of close to €9bn this year and next year, according to its forecast.