By John Burns

Copyright independent

Joining the Central Bank and the Irish Fiscal Advisory Council in advising against excessive extra spending in the Budget on October 7, the research institute said it has concerns about the fiscal stance being adopted by the Government.

Professor Alan Barrett of the ESRI has told the Oireachtas Committee on Budgetary Oversight that current policy risks “overheating” the economy, by adding stimulus when it is not needed.

Other budgetary watchdogs have also argued that running a deficit is not advisable when an economy is performing well, and is already at or above its potential output. Sound economics suggests a counter-cyclical policy.

“Ireland’s fiscal policy looks pro-cyclical right now, which creates immediate risks such as overheating, and longer term risks such as the need to continue with a pro-cyclical fiscal stance in any downturn, thereby magnifying the downturn,” TDs and senators were told

“We see merit in moving to a situation where underlying surpluses are achieved.”

Paschal Donohoe, the Finance Minister, has said he will introduce a €9.4bn package of extra spending and tax cuts in the Budget.

Martin O’Brien, head of the Irish Economic Analysis division at the Central Bank, said yesterday this package is “unnecessary”, given how well the Irish economy is already performing. “The economy does not need that level of fiscal support,” he said.

The ESRI pointed out that “overheating” is not just about feeding inflation, but also leads to capacity constraints, which could hamper delivery of the National Development Plan and housing targets.

However, in a suggestion that Mr Donohoe should again introduce cost-of-living measures in the Budget, the ESRI said temporary measures in previous years were successful in helping households deal with higher prices.

“Their phasing out will cause affordability issues, particularly for the older population and those with disabilities, if headline welfare payments fail to keep pace with income growth,” Prof Barrett said.

He also pointed out to TDs and senators that this Oireachtas committee was set up in the wake of the financial crash, as was the Irish Fiscal Advisory Council. Their role was to interrogate budgetary policy in a robust way.

“There was a very strong move towards fiscal rules that, in a sense, anchored fiscal policy,” he said. “They sort of evaporated somewhat around the Covid crisis and have never really been reinstalled.”

Prof Barrett said that while the headline figures show general government surpluses, these do not reflect the full picture. “It is well understood that the underlying figures show deficits, once account is taken of the windfall corporate taxes, both those from the CJEU [Apple] case and those which are ‘unexplained’ by economic fundamentals,” he said.

This leads to a concern that the windfall revenues could evaporate quickly.

“History – in particular the economic collapse – provides a stark reminder that a vulnerability in the tax base can become a major problem if something arises to test the vulnerability,” Prof Barrett said. “Potential instability is magnified by the fact that so few companies are responsible for such a large proportion of tax revenue.”