LDN - Business

Irish watchdog says budget not prudent, sees echoes of past mistakes

[November 28, 2018] By Padraic Halpin and Conor Humphries

DUBLIN (Reuters) - Ireland's fiscal watchdog ruled on Wednesday that the government's budget plans for 2019 were counter to prudent economic management, its strongest warning for years that some of the policy mistakes of the recent past were being repeated.

The Irish Fiscal Advisory Council, set up in response to the years of reckless spending that left the Irish exchequer hugely exposed when the 2008 financial crisis hit, had assessed prior to the delivery of the budget last month that the spending and tax plans were sound.

However, a significant unbudgeted increase in spending this year, mainly on healthcare, changed that view and the Council warned on Wednesday that repeated failures to prevent such increases within a given year had left the public finances more exposed to shocks, including the potential impact of Brexit.

"We are seeing budget plans that aren't being carried through on, we are seeing spending based on revenue sources that may not turn out to be permanent, and we don't have a clear and credible medium term fiscal plan set out," Seamus Coffey, chair of the Irish Fiscal Advisory Council, told journalists.

"There are echoes of policy mistakes of the past. There is no doubt about that."

Ireland's prime minister and finance minister said they would not dismiss the criticism out of hand as other governments had, but defended the balance they sought to strike between meeting spending demands and strengthening the public finances.

"We just couldn't turn a blind eye to that need to invest in public services and public infrastructure," Prime Minister Leo Varadkar told a news conference.

In its twice-yearly fiscal assessment report, the Council said budget plans for 2019 were built on an "imprudent" increase in spending in 2018 and budget overruns had become habitual.

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Cranes are seen along the skyline in the Irish Financial Services Centre in Dublin, Ireland April 24, 2017. REUTERS/Clodagh Kilcoyne

Failures to prevent unplanned spending increases have meant long-lasting increases in spending that are difficult to reverse, it said. The dependence on windfall corporate tax receipts from foreign multinationals had echoes of the dependence on real estate stamp duty in 2006, it said.

The Council is mandated to assess whether the government's fiscal stance each year is prudent. But the ultimate arbitrator on budgetary matters is the European Commission, the European Union's executive, which last week ruled that the budget was compliant with EU fiscal rules.

Coffey said the Commission had a narrower remit that only looked at forecasts for 2019. The fiscal Council, he said, was looking at the medium term plans that were "not credible" after past objectives had effectively been dropped.

The government intends to balance the books for the first time in more than a decade next year, however the Council estimated that a surplus would have been achieved much earlier had the unplanned spending drift not occurred since 2015.

It said Dublin had wasted opportunities to cut the ratio of debt to output, still higher than in many rich countries.

"It wouldn't take a significant shock to have the debt ratio stop falling or even begin to increase," Coffey said. "We feel we could and should be in a stronger position."

(Reporting by Padraic Halpin and Conor Humphries; Editing by Robin Pomeroy and Peter Graff)

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