Ireland's fiscal watchdog has advised the government to pinch pennies before October's budget announcement.
ADVERTISEMENTThe Irish Fiscal Advisory Council (IFAC) has warned that the government's handling of state finances is adding "needless pressure" to the country's economy.
According to the watchdog, past overspending mistakes risk being repeated, which led to austerity measures during the 2008-9 financial crisis.
One particular cause for concern, explained the IFAC on Wednesday, is the government's repeated violations of its own spending rule.
Introduced in 2021, the rule limits spending growth to 5% per year - unless the expenditure is financed through higher taxes.
The Irish government announced an €8.3bn budget in July, which in light of tax revenue raised spending by 6.9%.
"By pumping more money into an economy with record employment rates now, the Government risks worsening the problem of rising prices and capacity constraints," said the IFAC.
The warning relates to Ireland's upcoming budget, due on 1 October, ahead of a general election that must be held by March 2025.
Inflationary pressures
The IFAC is concerned that, by injecting more money into the economy, increased demand for goods and services will push up prices.
Wednesday's statement estimated that consumer prices in 2025 will be 1.9% higher due to breaches of the spending rule since 2022.
This adds about €1,000 to a typical household's yearly outgoings.
Strong employment trends from Ireland also pose inflationary risks.
"A key piece of evidence that the economy is operating above potential is what is happening in the labour market," John D. FitzGerald, professor in economics at Trinity College Dublin, told Euronews Business.
"Employment is up 2.7% year-on-year in the first six months of 2024. Most of these additional jobs are for graduates, and two thirds have had to be filled by returning emigrants or foreigners coming from abroad. They are generally going to highly paid jobs."
Higher employment levels mean that individuals have more disposable income, leading to increased demand and higher prices.
To cater for this demand, companies are hungry for workers, which can also push up wages and fuel inflation.
ADVERTISEMENT"The short-term solution is for the government to raise taxes or cut expenditure to slow employment growth," Professor FitzGerald said.
Why not spend the surplus?
Given the strength of Ireland's economy, notably its projected €8.6bn surplus, the IFAC's warning could seem overly pessimistic.
Even so, aside from inflationary risks, the watchdog has cautioned that the surplus is also misleading - due to Ireland's status as a multinational magnet.
"While the Government boasts a surplus, this is driven by taxes from a handful of multinationals," Wednesday's statement said.
ADVERTISEMENT"Without these windfalls, Ireland would be in a large and growing deficit … If corporation tax or the exceptional numbers of people at work reverse, the Government might have to cut back on its promises."
Ahead of the forthcoming election, however, pulling tight on the purse strings could be politically complicated.
Despite Ireland's economic gains, infrastructure in the country is at a breaking point - notably in the cases of housing and healthcare.
"It would be hard for the government to completely set aside the excess corporate tax revenues given widespread demands from the public for support and a looming difficult election," Ricardo Amaro, lead economist at Oxford Economics, told Euronews Business.
ADVERTISEMENTAmaro nonetheless echoed the conclusions of the IFAC's analysis, underlining that corporate tax revenues are "concentrated and unpredictable in nature".
In order to boost infrastructure while protecting against inflationary pressures, he noted that "targeted measures" would be preferable as opposed to "the blanket support of recent years".
"The current rule is loose enough to accommodate investment needs in housing and infrastructure as long as there is some discipline in other areas," he added.
