The financial crash was back in the headlines this week, following the death of Seán FitzPatrick. Thinking back on that time, one of the central lessons was clear: just how quickly things can turn.
FitzPatrick's Anglo Irish Bank went from star turn of the markets to the villain of the piece in just a year and half. Its share price peaked at €17.31 in May 2007 – by the end of 2008, after the Government guarantee, the €17 had disappeared and the shares were worth just 31 cent.
The quick turn in the fortunes of the banking sector may have been triggered by international factors. But it was born of decisions in Irish boardrooms and, unlike the exotic financial instruments which caused trouble internationally, the Irish collapse was down to good old-fashioned bad lending. The problems of overexposed lending to an overinflated property market had been hiding in plain sight for some time. But a view seemed to grow that Anglo had pioneered some new kind of banking model.
The quick turn in Anglo’s fortunes was reflected at a national level. Of course there was a link between the two. But the complete collapse of property-related tax revenues – and the wider impact on the public finances of recession – sent the exchequer finances deep into the red, before any cash was put into the banks.
Cliff Taylor: Who will pay the massive bill for climate transition?
Cliff Taylor: New delays in reopening offices mean there is no going back to the old ways
Cliff Taylor: Rural and urban Ireland will fight over who pays the price in climate debate
Is Britain now pushing for a post-Brexit border in the Celtic Sea?
Again, the speed of change was dramatic. Again the warning signs had been there, but just were not given enough attention.The exchequer finances went from a small surplus in 2007 to deficit of 7 per cent of GDP in 2008 and 13.9 per cent of GDP in 2009.
Deficit trend
Once things turn in a small, open economy such as Ireland they can turn quickly – for better as well as worse. In terms of the maths, the deficit each year is the different between two high numbers – revenues and spending. Relatively small changes in these can turn the deficit trend quickly.
With the economy having come through what we hope is the worst of the pandemic, financial targets are again being beaten. Government borrowing for this year could come in around €10 billion – half what was forecast at the start of the year and much better than was feared, or could have been expected.
The lesson from the financial crash is not that we can forecast when, or even if, trends will turn. We don’t know. It is a more subtle lesson. It is to look for risks and realise the potential speed of change. And here one factors stands out now – the growing reliance on corporation tax, which is again a key factor in the outperformance of the exchequer this year. We are increasingly reliant on decisions taken in a couple of dozen US boardrooms and the fortunes of these companies.
The surge in corporation tax has been staggering. This year it could conceivably bring in something over €14 billion – not far off one euro in every four of tax collected, way above international or historical norms.
Corporation tax receipts have roughly doubled since 2015 and more than half of the cash comes from the 10 biggest multinational taxpayers. When you count in income taxes as well as corporation tax, foreign multinationals are responsible for about one in every three euro of tax collected.
Future official projections do build in some fall-off in taxes paid from the current extraordinary levels , including a €2 billion allowance for the impact of the OECD corporate tax reform process.
But the point is that it is not entirely clear – at least from the outside – why payments are so high. Profits have been strong. And Ireland has clearly got a big boost from the first phase of the OECD reform process from 2015 onwards – though the Fiscal Advisory Council warns that up to half of all corporate tax receipts here are unexplained.
The latest OECD corporate tax reform process will bring minuses in terms of tax revenue for Ireland as well as pluses – but the real issue is its unpredictable impact on where companies invest and pay tax. And a messy breakdown in the talks – or a partial agreement OECD agreement – would also pose threats.
Implications
There are two implications to this. One is that we can’t continue to use soaring corporate tax receipts to cover overspending in other areas. Departmental spending limits are designed to deal with this and will need to be adhered to if we are not to keep increasing our bets on this potentially volatile tax source. Lower borrowing this year means there should also be some leeway in next year’s sums. Money has also been set aside in a contingency fund. But spending is now firmly on an upwards track.
The second point relates to the assumption in much of the national debate that we can pay for all we plan to spend in the years ahead without increasing the tax base. A wider social safety net is planned post-Covid, health spending has jumped higher and big bills lie ahead from the green agenda and an ageing population. These permanent commitments require sources of funding.
It was interesting to see Prof Niamh Moloney, chair of the Commission on Tax and Welfare, specifically refer at a recent Oireachtas committee to the sustainability of the public finances as part of the group's considerations. The commission is due to report next summer.
This is going to set off one heck of a row. Because by the middle of next year the golden goose of corporation tax may still be laying, the exchequer targets may again be being beaten and talk of higher taxes will go down like a political lead balloon. Perhaps corporation tax may be the gift that keeps on giving. Perhaps it will stabilise around current levels.Though we remember, too, from the financial crash the danger of planning for soft landings.