Budget watchdog warns ‘overheating economy’ is real risk

There is a “realistic possibility” that the economy will start to overheat in the coming years if the strong growth rates continue, the state’s budgetary watchdog has warned.

It comes as the latest Exchequer data shows that tax revenues in August totalled €2.66bn – about €209m below expectations at this stage of the year, highlighting the little wriggle room available to the Government, although analysts said the public finances remain broadly on target.
Income tax receipts, at €1.5bn, were broadly in line with the profile for August, but 1.8pc below target for the year to date.

Vat, by contrast, was €22m above profile on the month, and up 1.1pc so far this year.
Meanwhile, the Irish Fiscal Advisory Council (IFAC) warned that Ireland has the fourth-highest public debt level in the developed world, and that Brexit could be worse on the economy than anticipated.

It is urging the Government to avoid any extra stimulus in the Budget, and fund any extra measures either through a hike in taxes, or cuts to spending in other areas.
It estimated that there is just half a billion euro available to the Government in the Budget for extra tax cuts or spending increases beyond what has already been promised. It pointed out that the Government broke EU spending rules for Budget 2017 by €600m – €400m more than the Council originally thought.

IFAC chairman Seamus Coffey said the Government must stick to the strict EU budget and spending rules.
“The spending rule and the other elements of the fiscal framework were put in place to prevent repeats of past crises,” he said.

In its pre-Budget statement – the first under Mr Coffey’s chairmanship – the council reiterated its that there is no need for any stimulus at this time, warning that risks of overheating could materialise in future years.
“It is important to stress that there is not significant evidence of overheating in the economy at present,” the council’s statement said. “While wage growth has increased recently, core HICP inflation and other price pressures remain relatively subdued.”

But it added that significant risks remain, including high debt levels and Brexit. Only Portugal, Japan and Italy have higher debt burdens that Ireland.
“The hard Brexit assumed in the Department’s [of Finance] forecasts could be more negative for Ireland’s trend growth rates than is currently expected and further risks are posed by the concentration of Ireland’s exporting base and potential changes to the international tax system,” the council said.

Current estimates of gross fiscal space suggest €1.7bn is available for next month’s budget, and the council stated that there is a further €500m of scope for new initiatives created through non-indexation of the tax system. But it added that much of the fiscal space is already pre-committed following a number of past government promises, as well as the cost of demographic changes.
This includes tax and spending carry-over costs from Budget 2017 of about €650m, as well as €170m of tax-related decisions made in Budget 2017 but whose costs are only realised in full next year. There are also similar carry-over effects on the spending side of about €470m.

The IFAC also points out that a number of spending plans have already been outlined by the Government, further reducing the fiscal space by about €900m. This includes spending on housing and dealing with the homelessness problem. This leaves around €500m for new measures. In June the council warned that the Government about pushing EU spending rules. Initial estimates suggested the Government broke spending rules by €200m, but the council said that has now been revised to closer to €600m.
The Council said public investment plans here look set to ramp up rapidly over the coming years, with spending set to be among the highest in the EU as a share of government spending.

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