The spending plans Leo Varadkar unveiled during the Fine Gael leadership bid would be in breach of EU fiscal rules if they were rolled out in the next budget, a state watchdog has warned.
The Irish Fiscal Advisory Council (IFAC) said that, based on current assumptions, there is €500 million available in the next budget for tax cuts and spending increases.
The government is currently negotiating a new public sector pay agreement, which is expected to use up €200 million of the money available for this year, although public sector unions are ramping up demands as the talks enter their final phase.
If the 2018 budget introduces any measures beyond the remaining €300 million available, these increases will have to be funded through cutbacks in spending and additional tax hikes.
The government risks being sanctioned and fined by the European Commission if it fails to comply with the rules, IFAC said.
Advertisement
During leadership campaigning, Mr Varadkar committed to significant spending increases in health, education, childcare, transport and infrastructure.
He also pledged to reduce the marginal rate of tax on incomes over €70,000 from 52 per cent to 50.
The new Fine Gael leader said he would fund this extra spending through easing up on the debt reduction target announced by Michael Noonan, the finance minister.
According to EU rules, the government must lower the national debt to 60 per cent of GDP or lower, but due to problems measuring Irish GDP, Mr Noonan imposed a new target of 45 per cent.
Irish GDP has been artificially inflated by the activities of multinationals, which forced the Central Statistics Office to ugrade growth to 26.1 per cent in 2015.
Advertisement
IFAC said that because of the nature of Irish GDP, a debt target of 45 per cent is equivalent to 65 per cent, “when measured more appropriately.”
Mr Coffey said the gross fiscal space available to the government in October’s budget is €1.8 billion, but €600 million is already accounted for by demographic factors such as an ageing population.
He added that the government made significant strides between 2012 and 2015 to comply with EU fiscal rules but there had been a slippage from this path since then. The government has been in breach of EU fiscal rules over the past two years because its tax and spend measures were above what was needed to achieved a balanced budget by 2018.
Opposition parties have called on the government to seek a derogation from EU fiscal rules so that the expected €3 billion from the part sale of AIB later this month can be invested in infrastructure projects.
Mr Coffey said there is strong cyclical recovery and the economy does not need any extra fiscal stimulus. Any one off revenues such as the sale of AIB should be used to pay down debt because existing debt levels are high by EU standards, he added.
Advertisement
He said even though the government promised to “Brexit-proof” the economy, there is no evidence of this in the last two budgets.
All the extra money that has been generated through high corporate tax receipts have been spent, meaning there is no fiscal cushion if there is an economic shock such as a hard Brexit.