The Central Bank of Ireland has warned that up to €15 billion of the Government’s corporate tax revenue is potentially at risk from a sudden reversal.
It also claimed that the Government should be diverting more of these receipts into the State’s two long-term savings funds, particularly in light of the risk posed to Ireland from a second Donald Trump presidency in the US.
Because “of the extensive trade and investment links between Ireland and the US, the Irish economy would be particularly susceptible to changes in US policy on trade and tax”, the bank said in its latest quarterly bulletin.
The Department of Finance expects corporate tax receipts to hit a record €29 billion this year. And that’s not including the incoming €14 billion of Apple tax money.
The Central Bank said about €15 billion of this is effectively divorced or “delinked” from economic activity here and should therefore be classified as “excess” and potentially transitory.
It also warned that a significant portion of these excess receipts were being used to fund “within-year government expenditure” while just one third (€5bn) was being set aside in the State’s two long-term savings funds.
Last year the Government announced plans to create a €100 billion sovereign wealth fund from Ireland’s windfall corporation taxes and a smaller infrastructure and climate fund worth €14 billion to support capital spending in the event of a downturn. So far €8 billion has gone into the wealth fund and €2 billion into the infrastructural one.
“The ability to deliver infrastructure sustainably is especially important in a small open economy such as Ireland in order to maintain incentives for foreign investment,” the Central Bank said. “This is especially the case as the risks of geoeconomic fragmentation are rising.”
In its report the regulator pinpointed a protectionist pivot in the US as the main short-term threat to the Irish economy, noting it could spark a major disruption to global trade.
“While specific policy actions of the incoming administration in the US have yet to emerge, higher tariffs or changes in tax regimes that reduce the profitability of US MNEs operations in Ireland could influence future investment decisions by those companies here,” it said.
The Central Bank’s director of economics and statistics Robert Kelly said a change in US corporate tax designed to bring back IP (intellectual property) or patents domiciled abroad posed a bigger threat to Ireland than tariffs.
Despite the risks the bank said the baseline outlook for the Irish economy remained favourable, with modified domestic demand, a measure of domestic activity, expected to grow by over 3 per cent this year and next as real income increases underpin consumer spending and multinational exports recover from a slump in 2023.
“With the unemployment rate averaging 4.5 per cent for almost three years the economy is at full employment and overheating risks are present,” it said.
Housing completions in 2024 are forecast to fall slightly below last year’s 33,000 total before picking up to 37,500, 41,000 and 43,500 units in 2025 and 2026, and 2027 respectively.
“Despite this transfer of labour from non-residential to residential construction, in the absence of substantial productivity gains and more widespread adoption of innovative construction methods, the availability of labour and delays in the planning system may limit the scale of increase in residential construction over the near-to-medium term,” it said.
- Sign up for the Business Today newsletter and get the latest business news and commentary in your inbox every weekday morning
- Opt in to Business push alerts and have the best news, analysis and comment delivered directly to your phone
- Join The Irish Times on WhatsApp and stay up to date
- Our Inside Business podcast is published weekly – Find the latest episode here
