The Government will have to choose between cutting taxes and increasing spending, the Irish Fiscal Advisory Council has warned.

Last month, a number of backbench Fine Gael TDs suggested this year’s budget cut taxes by €1,000 a year for the average worker. 

Minister for Finance Michael McGrath confirmed there would be tax cuts in the budget but declined to say by how much. 

The Government has committed itself not to raise public spending by more than 5% in a single year and IFAC chairperson Sebastian Barnes said this means Ministers have limited options. 

“If they stick to that rule, they are going to have to make choices in the budget basically between what they do on the tax side and what they do on the spending side,” he told Newstalk Breakfast. 

“The standstill costs - that’s the costs of basically there being more pensioners but also raising pensions and pay and things in line with wages, as well as the Government’s investment programme - they basically take you above the amount the Government can spend under that spending rule. 

“So, they are going to have to make some choices.”

State Wealth Fund

Surging corporation tax receipts are forecast to deliver a budget surplus of €10 billion this year and a further €16 billion in 2024.

The Government has said it will establish a State Wealth Fund - similar to the one set by the Norwegian Government in the 1990s - which could be spent the next time the country enters recession. 

Mr Barnes said long-term thinking is needed when it comes to spending plans. 

“In the short-term, the economy is operating very close to capacity,” he said. 

“So, if we put in more money, there’s a risk that could rub up against those capacity constraints. 

“It’s going to lead to inflation, it’s going to lead to higher rents and it’s going to harm the economy.” 

Paschal Donohoe and Michael McGrath. Picture by: Julien Behal Photography

Mr Barnes said things have been going “quite well” for the Irish economy in recent months but cautioned that could change very quickly. 

“We do have this large inflow of corporation tax coming,” he said.  

“About a third of it [is] paid for by just three companies, which will leave us very vulnerable if we spend it. 

“But of course, there are going to be big pressures; people are going to see that money, we’re two years away from an election. 

“So, it’s very important that we do plan ahead.” 

Budget 2024 is due to be delivered in October; opposition parties have urged the Government to spend some of the surplus mitigating the cost of living and housing crisis.

Main image: Split of cash and a bus.