(Bloomberg) -- The Irish government is adding “needless” pressure to the economy by breaching its own spending rule in its upcoming budget in October and risks having to reverse promises later on, the state’s fiscal watchdog warned.
The government announced an €8.3 billion ($9.2 billion) budget package in July, comprising €6.9 billion of additional public spending and €1.4 billion on tax measures. That raised total expenditure by 6.9%, breaching its own 5% annual overall spending increase rule. Its something the central bank previously warned could fuel inflation.
Domestic prices have continued to rise, the Fiscal Council said in its pre-budget submission and warned that planned spending increases by the finance ministry will add “fuel to the fire.”
The small, open economy has one of Europe’s only budget surpluses, largely thanks to the disproportionate corporation tax receipts it collects. That intake, which is expected to hit a record €24.5 billion ($27 billion) this year, is highly volatile and windfall by nature though. The surplus is misleading, said the watchdog and without the corporation tax receipts, Ireland would be facing a deficit.
If vulnerabilities, such as a reduction in the windfall corporation taxes or increasing spending when the economy is already near capacity, are exposed, “things we’ve seen in Ireland over our history going back to 2008, the early 1980s and even back to the 1950s could reemerge again,” Seamus Coffey, chair of the Fiscal Council, said at a briefing on the Fiscal Council’s pre-budget statement released Wednesday.
The budget comes ahead of a general election that must be held by March 2025 and housing, health and major infrastructure constraints will be top of voters’ minds.
“There isn’t the space in the economy to accommodate additional demand, so it adds to the pressures now and may mean the government has to later reverse commitments,” Coffey said. “Continuing to breach the rule, its own rule, will push up prices and generate a wider underlying deficit.”
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