Govt breaking its promise on spending increases

Last year, Minister for Finance Simon Harris and Minister for Public Expenditure Jack Chambers promised the days of continuous spending overruns were at an end.

Their message was that the party was over for departments and ministers who had overseen enormous surges in spending over recent years.

Minister Harris said expenditure allocations were being increased and "departments now need to live within those budgets". Minister Chambers said that continuous spending overruns, by departments that could not operate within their means, had to come to an end.

The two ministers published a Medium Term Fiscal and Structural Plan, which set out expenditure ceilings for each year.

Ireland was required to submit the document to the EU.

In 2026, spending was supposed to be limited to an increase of 7%.

That was an enormous rise, bigger than any expenditure increase in any other EU country.

But now, as we approach the Budget on Tuesday, it is clear the spending ceiling for 2026 will be broken.

Expenditure so far this year is up 7.8%, compared to a forecast of 6.3%, according to Ireland's budget watchdog, the Irish Fiscal Advisory Council.

The Department of Finance published a paper last night that gave an estimate of the public finances for this year.

It indicates that the Coalition will break its spending ceiling for 2026, with gross expenditure breaching its limit by €1.5 billion.

About half of the additional spending is because the Department of Health is over budget.

On Budget Day, when the Government announces the Christmas Bonus (a double social-welfare payment in December) it will add another few hundred million to the overrun.

Oddly, the Christmas Bonus is not allocated funding every year so it becomes additional item when confirmed by the Minister for Public Expenditure in the Budget.

The money for all this additional spending is obviously coming from corporation tax paid by multinationals, which continues to grow rapidly.

There are two types of corporation tax: the first relates to activity in Ireland and the second is money generated abroad that is taxed in Ireland.

This second category is known as 'windfall' tax and is considered particularly vulnerable.

A decision by a US-headquartered company could easily divert profits away from Ireland without a factory being closed or single job being lost.

But from the point of view of the public finances, such a move could trigger a significant drop in the tax revenue that is used to run the country.

€7bn deficit without windfall taxes

If these windfalls were stripped out of the public finances, Ireland would run a deficit of €7 bn instead of a surplus this year, according to the Central Bank.

While Ireland's overreliance on corporation tax is well known, the Economic and Social Research Institute also points out that it is not just corporation tax that could be a problem if multinational activity wobbles.

It says income tax is buoyed by multinationals because they employ so many highly paid staff.

In addition, VAT receipts are being partly inflated by Government spending, which seeps into the economy and results in more consumption by households and businesses.

In other words, the activity by multinationals supports the whole edifice of the public finances.

But rapid spending increases are not the only worry.

The energy shock caused by the Iran war is making the international backdrop look increasingly concerning.

That has led to a significant increase in the cost of borrowing for the US, which has seen the yield on its ten-year bonds shoot up to 5.2%. Homebuyers now pay 7% on mortgages in America.

Ireland is not immune from these huge changes in the bond market. The interest rate on Irish ten-year debt is 3.6%, up from 3% in February.

The prudent course of action would be for the Government to run a bigger surplus when it announces the Budget next week.

But despite the Coalition’s talk of fiscal discipline, it looks as if the immoderate spending will continue.