Up to €6 billion, or 60 per cent of the Government's corporation tax windfall may be temporary, leaving the public finances extremely exposed to a potential reversal, the Irish Fiscal Advisory Council (Ifac) has warned.
In its latest fiscal assessment report, the budgetary watchdog highlighted the Government’s increasing reliance on business tax receipts, which rose to a record €10.4 billion last year, more than double the amount collected in 2014.
The jump in receipts has been linked to the “on-shoring” of assets here in the wake of a global clampdown on multinational tax avoidance and increased corporate profitability generally.
About 50 per cent of last year's total came from just 10 companies, believed to include tech giants Apple, Microsoft, Dell, Google and Oracle.
The council noted corporation tax receipts now accounted for one in every five euro of tax collected by the Government. It warned that between €2 billion and €6 billion of the current €10 billion total may be what it called “excess”.
“In other words, beyond what would be expected based on the economy’s underlying performance and historical and international norms,” it said.
Inherently volatile
The council said corporate tax was inherently volatile and in Ireland’s case strongly concentrated in a small number of companies.
“This, together with potential changes in the international tax environment, leaves government revenue particularly exposed to shocks,” it said.
The Government’s large corporate tax buffer was also providing a convenient smokescreen for unplanned spending hikes, particularly in the area of health, it said.
The council, which was set up after the crash in 2011 to watch over the government’s budgetary arithmetic, has repeatedly criticised the current administration for failing to keep spending in check and for not adhering to its own spending plans.
It warned that Government spending this year was likely to overshoot by about €700 million, in part because of overruns in health. Budget 2020 involved a spending hike of 4.4 per cent, which was significantly ahead of the 3.1 per cent signalled earlier in the year.
Ifac said the increase, while not signalled until the last minute, was still sustainable, however.
Nonetheless it noted the Government’s recent sequence of budget overruns have been driven by increases in current expenditure and “hence will be long-lasting in nature” or at least difficult to reverse in a downturn.
Ifac chairman Seamus Coffey said the additional corporate tax revenue was "very welcome" and provided a financial boost to the exchequer. "The issue is how reliant do we become on it for our day-to-day economic activities," he said.
Potential to overheat
Mr Coffey also warned that with 80 per cent of receipts coming from foreign multinationals, spending the additional revenue had the potential to overheat an already fast-moving Irish economy.
The Government has pledged to channel some of the excess into the State’s so-called rainy-day fund. However, Ifac was critical of the plan, which it said had been watered down since its inception in 2016. Originally the Government promised to set aside €1 billion every year, starting in 2019, but this was later revised down to €500 million and then deferred altogether because of Brexit.
In its report, the council warned that while the threat of a disorderly Brexit had receded the economic outlook remained "unusually uncertain". It also noted that Ireland has one of the highest debt ratios in advanced economies, leaving it more vulnerable to shocks.
