Government spending boosted prices by 2% in four years – watchdog

Ireland’s budget watchdog has warned that additional government spending will have boosted consumer prices by 2% cumulatively by the end of next year.

The Irish Fiscal Advisory Council (IFAC) said that the result of the government spending beyond its budgetary limit of 5% since 2021 has pushed prices up.

Prices rose by 0.4% in 2022, 0.6% in 2023, 0.5% in 2024 and are expected to increase by 0.4% in 2025 due to breaches of the rule, it said.

IFAC chairman Seamus Coffey said that the extra spending by the government at budget time can give “an illusion of a gain” which is then offset by general cost increases.

“When we see a typical household that might have outgoings of 50,000 euro a year, that 2% increase equates to 1,000 euro if the price level is higher, as is estimated to be because of the additional government spending,” he said.

“While households might be benefiting from the additional government spending on one side – so they can see a direct benefit from the additional spending the government is doing – there can be indirect costs through a higher general price level so it can be an illusion of a gain being offset by these indirect costs.”

The IFAC said the government should “stick to its rule” and if it does it can “curb price pressures, ensure sustainable growth, help Ireland weather future recessions”.

The fiscal watchdog also noted that employment rates in Ireland are at record highs, with an 84% employment rate expected in 2025.

Wages are exceeding inflation but prices remain high, it said, driven by capacity constraints and international effects such as energy pressures.

Mr Coffey, an economics lecturer at University College Cork, said there were “some parallels” between the ’00s and now, stating that both featured budgetary surpluses and an over-reliance on certain parts of the economy (housing and corporation tax revenues, respectively).

“So the surpluses up to 2007 didn’t make things safe then, doesn’t necessarily now,” he said.

“With the exposure to potentially temporary tax revenues, and the narrowing of the tax base – three companies paying 10 billion euro in corporation tax – there are some parallels to what we saw in the run-up to 2008.”

Mr Coffey said that while there was a clear demand for health and housing services from the State, he said “the everything everywhere all all at once” approach “is costly”.

He also said that it was too early to say whether the population increase will lead to permanent impacts on the economy.

Mr Coffey outlined a scenario where the number of people who are unemployed increased from record lows of 4% to 5.5%, and where windfall corporation tax receipts fell to a level where Ireland ran a deficit.

“And what would happen if tax revenues were slightly lower due to higher unemployment? What would happen if social welfare spending was slightly higher due to that unemployment? And what would happen if you didn’t have these windfall corporate tax receipts?”

He said that if overruns in the Department of Health continue, the overrun this year could be close to 2.5 billion euro.

“Spending on health – there’s no issue with that. The issue is the planning and does the economy have a capacity to absorb it. So clearly, from a planning perspective, the figures on last year’s budget aren’t being adhered to and then as you pump this money into the economy, and it has wider implications on prices and the consequences are being felt elsewhere,” he said.

The IFAC gave its economic analysis ahead of Budget 2025 on October 1, the final budget of the Fine Gael-Fianna Fail-Green party government.