Fiscal Priorities for the Short and Medium Term

The Irish economy has withstood the effects of recent negative shocks and is at full employment. Starting from this favourable position, fiscal policy now has a central role to play in maintaining sustainable growth while at the same time addressing structural challenges. The public finances face growing demands linked to the cost of maintaining existing public services along with the need for additional investment to meet emissions reduction targets. Our analysis finds that expenditure growth above the Government’s 5 per cent rule without offsetting revenue-raising measures would provide an unnecessary stimulus to demand and damage the economy’s competitiveness. Additional expenditure should be accompanied by offsetting revenue-raising measures to help create capacity in the economy for public investment. Such measures are also warranted to ensure the tax base is resilient in the face of growing expenditure pressures and significant concentration risks to corporation tax and other government revenues. To help achieve these aims and to add credibility to fiscal plans, the government should commit to an anchor for expenditure growth net of tax changes. Policy should aim to reduce inefficiencies in the planning and delivery of capital projects to improve value for money and ensure the benefits of public investment for long-term growth are fully realised.