Gabriel Makhlouf also said taxes must rise to meet the growing demands on the State.
In his annual pre-Budget letter, Mr Makhlouf warned the minister that a spending rule introduced by the Government in 2021 has been consistently ignored and looks set to be breached all the way up to 2026.
The rule is supposed to cap increased spending by the Government at 5pc a year, in line with estimates of the growth potential of the economy, unless the increases are matched by new tax or other revenues for the State.
While unforeseen factors, including the cost-of-living crisis at the end of Covid and the fallout from the Russian invasion of Ukraine, have been blamed for the overruns, the governor said such justifications for “temporary expenditure items being excluded is increasingly difficult to maintain”.
While the State is currently seeing a bumper tax take thanks to a windfall linked to corporate profits of multinationals Mr Makhlouf warned the minister that taxation will have to rise to meet permanent spending commitments.
“Given increasing demands on, and relative priorities for, the public finances, measures to broaden the tax base (such as recommended by the Commission on Taxation) and increase government revenue as a share of national income are increasingly unavoidable,” the letter said.
With the State flush with cash, for now, and government parties on an election footing, the warning is unlikely to be heeded, but Mr Makhlouf said such moves could ease inflationary pressure, as well as make the public finances more resilient.
“In the short run, this could help to guard against inflationary pressures while public capital spending is increased,” he said.
“Longer-term, with material uncertainty over the sustainability of current revenue from corporation tax and concentration risks in other revenue sources, new revenue-raising measures would help to create a more sustainable tax revenue base and more resilient public finances, with which future fiscal challenges can be addressed.”
The letter from Mr Makhlouf also backs government plans to create funds to manage some of the windfall tax take and is supportive of capital investment, including in housing and physical infrastructure.
