Extra taxes will need to be collected if the State is to cope with the spiralling public sector pay bill, according to a secret pre-Budget report.
The new, independent Parliamentary Budget Office (PBO) warns the sustainability of massive increases in the public pay bill is “questionable” and casts doubt over the Government’s ability to continue hiring nurses and Gardaí.
With Budget 2018 less than two weeks away, the report poses serious questions for Finance Minister Paschal Donohoe, who yesterday told Cabinet he is determined to introduce the first balanced Budget in a decade.
He also warned ministers there will be a significant requirement for Budget 2018 to provide funding to meet demographic pressures, including the hiring of additional teachers to address the increase in pupil enrolments.
The PBO was established in recent months to provide TDs with independent advice and costings on budget ideas.
In its first-ever submission, it offers an outline of the choices facing the Government in Budget 2018, which has been seen by the Irish Independent.
It puts the challenge of meeting the public sector pay bill in stark terms, predicting it will “increase sharply” in the years ahead. The report puts the extra cost at around €650m to €1bn a year.
“Over the medium term the sustainability of this is questionable without additional revenue-raising measures,” it says.
The figures are based on an assumption that the rate of increase in staff numbers will continue to be in the region of 2pc per year and takes account of the commitments made under the Lansdowne Road Agreement.
The overall bill could increase by 4pc to 6pc a year over the period 2018 to 2020, the report states.
The study has been submitted to the Budgetary Oversight Committee, which is expected to quiz Mr Donohoe’s on its contents today.
Revenue growth is estimated at 3.9pc up to 2020, leading the PBO to question whether or not the current rate of growth in public sector employee numbers is financially sustainable.
It also suggests that a question for Mr Donohoe is whether he plans to increase the fiscal space by discretionary revenue increases or expenditure cuts, in order to meet the cost of the new public sector pay deal.
The report notes that the Government has indicated it wants to reduce the tax burden on middle-income earners.
It cites Revenue figures showing that increasing the standard income tax rate band by €1,000 would cost €175m in the first year.
“This would use up most of the fiscal space currently apportioned to taxation measures,” it says.
If implemented those earning more than €34,800 would benefit by €200 a year, but those on the lower tax rate would not benefit.
Among other matters, the report also provides commentary on plans for a ‘rainy day fund’ and how Ireland’s contribution to the EU budget is likely to increase, in part due to Brexit.
Mr Donohoe yesterday told ministers that he is close to concluding the 2018 spending allocations for each department, but substantial work remains to be done before October 10.
He said the Budget will be balanced but “moderate sustainable increases in public expenditure to facilitate targeted improvements in key public services and infrastructure” will be available.
Speaking in the Dáil, Taoiseach Leo Varadkar said: “We will use the Budget to put money back in the pockets of families.”
He listed tax reduction, welfare increases and pay restoration among ways this can be done and said the measures will be “sustainable”.
“There is no point in giving something to families now only to take it away in a few years’ time,” Mr Varadkar said.