Income tax cuts in the next Budget are still on the table despite stark warnings that the Government’s forecasts for the State’s finances are “not credible”.
Fine Gael and Fianna Fáil are going to war over the economy in what could be considered the first shots of the budgetary negotiations.
Both parties have committed to passing a fourth and final budget under their Confidence and Supply Arrangement before an inevitable general election.
Fianna Fáil’s finance spokesman Michael McGrath has admitted it is likely to be the most difficult negotiation as both parties will have one eye on the election.
He has described this week’s report from the Irish Fiscal Advisory Council (IFAC) as “quite alarming”, suggesting it points to a “very significant hole in the public finances”.
Mr McGrath said the Government had not put enough focus on Brexit in its financial planning at a time when there was already “a softening in the economy”.
“Overall, it’s time to be cautious. We had a good run,” he said.
Mr McGrath was particularly critical of “spending drift” in departments. He said much of what his party agreed with the Government during the formation of the Budget was being allowed to change over time, adding it was “make it up as you go along” in the Department of Health.
But Finance Minister Paschal Donohoe defended his policies, insisting the Government is already responding to some of the issues highlighted by the IFAC, including an over-reliance on corporation tax.
Mr Donohoe said windfall gains were being used for debt reduction at a time when the Government was running the first budget surplus since the economic crash.
He noted that Fianna Fáil had talked about not repeating the mistakes that led to the end of the Celtic Tiger era.
“It’s worth emphasis that when Fianna Fáil talk about not wanting to repeat the mistakes of the past, it’s their past they are referring to,” he said.
Mr Donohoe noted that Micheál Martin’s party had issued a number of costly demands, including better pay for the Defence Forces and hospital consultants.
“So I actually welcome some of the points they have made for caution. I look forward to that transferring into the political demands they place upon me every day,” he said.
The minister also criticised Sinn Féin, saying it wants to abolish the local property tax and voted against measures such as increasing Vat for the hospital sector.
He is expected to publish a summer economic statement next week, which will outline the parameters under which the next Budget will be formed.
Asked whether he was still committed to raising the point at which workers enter the higher rate of income tax, Mr Donohoe indicated the long-standing promise remains.
“I am committed to looking to continue to make incremental changes to how we manage both taxation and spending.
“But what I will be doing in the summer economic statement is outlining the challenges we may have to face later on in the year,” he said.
Meanwhile, the Government has also received yet more budget advice from the European Commission.
In its latest stability report, the commission recommends that any windfall revenues should be used “to accelerate the reduction of general government debt ratio”.
It says the minister should “limit the scope and number of tax expenditures, and broaden the tax base”.
Carlos Martínez Mongay, the deputy director general of economic and financial affairs at the European Commission, said: “The commission recommends that Ireland address features of its tax system that may facilitate aggressive tax planning.”