The Irish Fiscal Advisory Council (IFAC) has reacted positively to Budget 2023, believing the government to have struck "a balance between providing support and avoiding adding excessively to higher inflation" while describing the overall package as "exceptionally large."
The budget watchdog said that announced increases in pay, welfare spending and pensions, together with €4.4bn in once-off cost-of-living measures would help to "protect people from higher energy prices and wider inflation."
IFAC agreed with the government's "sensible" decision to deviate temporarily from the 5% spending rule, which dictates that increases in permanent spending should not exceed 5%, in light of inflation, which is now expected to average 8.5% in 2022 and 7% in 2023.
"It is welcome that the government has signalled its intention to return to normal application for the spending rule from next year," IFAC said in its preliminary analysis. "The government should stand ready to take additional measures if needed if there are significant disruptions to energy supply this winter."
The council reserved criticism, however, for measures such as the electricity credits, the double child benefit payment, and the extension of the VAT and excise reductions on fuels, gas and electricity as "relatively untargeted".
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IFAC also warned of "domestic risks" that could derail growth, including competitiveness issues and capacity constraints arising from labour shortages, rising wages, and housing costs, as well as Covid-19 and Brexit.
Looking ahead, IFAC expects Ireland to continue benefitting from corporation tax receipts generated by the tech and pharmaceutical sectors, with the state expecting to take €20bn in corporation tax this year alone, nearly double the €10.9bn taken in 2019.
The council agreed with the Department of Finance's assessment that €9-10bn of corporate tax receipts this year will be 'excess' in nature, and the body remains wary of the unpredictable nature of the tax and the reliance on a small number of multinationals.
Minister for Finance Paschal Donohoe said on Tuesday that 500,000 workers in the FDI sector and 10 multinational companies generated around a third of total tax receipts. IFAC said that corporation tax would account for a quarter of Exchequer taxes this year, surpassing VAT for the first time as the state's second-largest source of tax.
IFAC welcomed the reintroduction of the rainy day fund, now known as the National Reserve Fund, which will be furnished with €6bn in corporation tax receipts by the end of 2023, saying it would "unwind" the state's reliance on excess corporation tax gradually over time and build up a buffer for future downturns.
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