ESRI criticises Government for not managing public finances ‘prudently’

The Government is not managing the public finances in a “prudent” fashion and should be saving more of the State’s corporate tax windfall, the Economic and Social Research Institute (ESRI) has warned.In its latest quarterly bulletin, the think tank said the Coalition should have more of a credible fiscal plan to eliminate the State’s underlying budget deficit, which excludes windfall taxes, and which is on course to hit €20 billion by 2030.Although the proposed €8.5 billion package for next month’s budget will leave the State with a surplus, this would turn into a considerable deficit in the absence of these windfall taxes, it said.[ Budget 2027: All you need to knowOpens in new window ]“This strikes us as being at odds with prudent fiscal management, especially where windfall revenues are used to fund recurrent expenditures,” the ESRI said.READ MOREThe institute also claimed that the Government’s expenditure starting point “loses meaning” if spending overruns are added to the base each year.“The real concern about the public finances is the windfall-adjusted situation,” said ESRI research professor Alan Barrett.About half the Government’s €33 billion corporate tax revenue is windfall, “when you make that adjustment, instead of having this healthy surplus, it looks [like] we have a considerable deficit”, he said.“We don’t expect that to be adjusted overnight ... but we should be trending in the general direction that we’re sort of weaning ourselves off that windfall,” he said. The increase in bond yields globally, a proxy for Government borrowing costs, was another reason why the Government should be saving more, Barrett said.In its report, the ESRI said the Irish economy was continuing to “grow steadily” despite the uncertainties in the global economy.Modified domestic demand, a more accurate measure of domestic activity, is forecast to be 2.6 per cent and 3.4 per cent in 2026 and 2027, with stronger-than-expected household consumption providing a tailwind.Domestically, unemployment remains low, household spending continues to increase and taxation revenues are rising across the board, it said.On the international front, it said the economy was caught in two cross currents: the energy price shock emanating from the Middle East and the large investment in AI-related infrastructure with many of the companies involved located here.“Given Ireland’s reliance on fossil fuels, we are very exposed to the pass-through of international price pressures to domestic households and firms,” it said.Headline inflation here is expected to remain elevated at 3.6 per cent this year and 3.3 per cent in 2027, keeping the squeeze on households and businesses.Although Ireland is benefiting from the AI investment boom, the State is exposed to “the very rapid roll-out of the new technology and the potential for return expectations on these capital outlays to underperform”, it said. Should Ireland share its corporation tax bonanza with the EU?Housing output and infrastructure investment remain a core challenge, with 39,200 new home completions expected this year and just under 40,500 in 2027.Housing demand in the economy is estimated to be more than 50,000. “The absence of a sufficiently large and sustained increase in planning permissions highlights a potential weakness in the medium term,” it said.The pass-through of second-round price pressures to the construction supply chain also posed a near-term risk to the Government’s plan to see homebuilding lift further.