Ireland to break spending rule again in pre-election budget

Ireland presents Budget 2022

By Padraic Halpin

DUBLIN (Reuters) -Ireland will increase public expenditure by 6.9% in 2025, again breaking the government's own budget rule capping spending growth at 5% and eating into projected budget surpluses to hand Dublin a much bigger than planned pre-election budget.

The 8.3 billion euro ($8.9 billion) package was far ahead of the 5.7 billion euro assumed a year ago and will allow ministers to cut tax and increase spending in October, ahead of an election that analysts expect in November.

Ireland's central bank and its independent fiscal watchdog have warned against breaking the budget rule again, saying it risked stoking inflation, damaging competitiveness and overheating the economy.

Public Expenditure Minister Paschal Donohoe, who designed the rule in 2021, defended breaching it for the third successive year, saying it had "performed an important service" in putting downward pressure on spending after bigger increases during the COVID-19 pandemic.

Donohoe and new finance minister Jack Chambers cited the need to accommodate higher capital spending and provide more public services for a larger-than-assumed population as a reason for the breach. They said that three-quarters of the additional spending was needed just to maintain existing service levels.

The government had put previous breaches down to the need to help ease a cost of living crunch. Inflation fell to a more than three-year low of 1.5% last month.

The plans are funded by one of healthiest public finances in Europe, but will result in a lower projected budget surplus of just under 6 billion euros for 2025 compared with the 9.7 billion euros forecast in April.

Additional healthcare spending for this year announced on Tuesday will also cut the forecast 2024 surplus to just over 7 billion euros from earlier projected 8.6 billion euros, or 2.8% of national income, previously pencilled in.

The government plans to put almost all of those remaining surpluses, which are entirely driven by booming corporate tax receipts paid by Ireland's hub of large multinationals, into new savings and sovereign wealth funds.

The budget package comes on top of the 4.5 billion euros already set aside for costs the government says may not repeat fully into the future, such as accommodating Ukrainian refugees.

The ministers said they were also considering topping up the pot on budget day with one-off cost of living supports. Similar measures last year ran to 2.7 billion euros.

($1 = 0.9244 euros)

(Reporting by Padraic HalpinEditing by Tomasz Janowski)