The Government here might be the only administration on the planet trying to hide the true nature of its financial position not because it is bad but because it is too good.
Typically, governments market themselves on their fiscal achievements provided they’re not Liz Truss and Kwasi Kwarteng (the UK’s former prime minister and chancellor), whose fiscal crash and burn lasted just 49 days last year.
Strong tax receipts tend to mean the economy is performing well while budget surpluses can allow governments to claim they are acting prudently even if the truth is often otherwise.
The notion that the Government here will have at its disposal a cumulative budget surplus of €65 billion over the next four years is problematic, however, when the State suffers from such a chronic deficit in public services and when we’re in the midst of a significant reversal in living standards.
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For extra spice, throw in the fact that we’re going into a hotly contested budgetary cycle and, potentially, an election year.
Already the Cabinet seems to be subdividing into a hawkish clique around Department of Finance Ministers Michael McGrath and Paschal Donohoe, and one led by tax-cutting man of the cash-strapped middle Taoiseach Leo Varadkar.
At the centre of this political and economic matrix is the golden goose of the Irish economy: corporation tax.
Despite repeated warnings that it is volatile, fed almost exclusively by 10 large firms and likely to fly away on a whim, it keeps laying diamond-encrusted Fabergé eggs.
The Department of Finance keeps lowballing its predictions for corporate tax, either because it is trying to manage expectations or because it genuinely can’t see under the bonnet of these companies and keeps getting surprised on the upside.
Last year receipts from the business tax jumped by an unprecedented 45 per cent to €22.6 billion, placing it ahead of VAT as the State’s second-largest revenue source. The total was three times the €6.9 billion collected as recently as 2015.
The department is forecasting that revenue will grow by a further 7 per cent this year to €24.3 billion.
Have two guesses what’s actually going to happen. The first indication that the department’s prediction will undershoot again is already out there but nobody seems to have noticed.
Perhaps this is understandable as it is packed away in the Central Statistic Office’s latest industrial production numbers, not something that would typically hold people’s attentions.
The figures, published earlier this month, show production in the State’s manufacturing industries increased by a whopping 70.7 per cent in April this year.
According to insiders, the jump relates to contract manufacturing by Irish-based entities. Contract manufacturing is where a company outsources production to a third party typically based abroad.
According to the same sources, the increase was driven almost entirely by Apple manufacturing iPhones in China.
There’s a straight read-through from contract manufacturing to corporation tax here as the profit generated from the sale of these phones is channelled directly through Apple Operations International, the Irish-based holding company for nearly all of Apple’s non-US subsidiary companies. A substantial portion will therefore land in Irish tax coffers.
The same sources say the department’s €24.3 billion projection for corporation tax this year will undershoot by at least €2 billion as a result, pushing up the Government’s projected surplus in 2023 and adding to the €65 billion projected surplus over the next four years.
Just three firms accounted for a third of all corporate tax receipts between 2017 and 2021, according to a recent report by the Irish Fiscal Advisory Council, suggesting the business tax base here is even more concentrated than we thought.
While the three firms are not named, we know the first name on the list is Apple, probably followed by Microsoft, probably followed by Pfizer, Intel or Google.
The main driver of the surge in receipts last year was Apple. According to the Companies Registration Office, Apple Operations International reported a significant increase in income last year while deductions for capital allowances did not keep pace, meaning the company’s tax liability here shot up.
At the National Economic Dialogue event last week in Dublin Castle, there was much talk about the need to spend strategically and not blow our newfound tax wealth, potentially overheating the economy in the process, even from NGOs (non-governmental organisations) that would normally be haranguing the Government for not spending enough.
Does this reflect a more economically savvy electorate, one that smells a rat when governments promise more services, tax cuts and fiscal probity all at once, something we had repeatedly in the lead-up to the financial crisis of 2008.
The Department of Finance estimates that up to €12 billion of corporate tax receipts are windfall – in other words divorced from the underlying performance of the Irish economy. The ideal scenario would be to stash these receipts in a sovereign wealth fund – they would build up quickly based on current projections – and to use the returns to address pressing social issues such as housing. This would give us a permanent source of wealth rather than one that might not be here in 10 years.
