Buoyant tax revenue and tight control of public spending has ensured the public finances remain well under control. The mid-year Exchequer returns show tax revenue 3.4 per cent ahead of target as a further sharp rise in corporation tax receipts – one fifth higher than projected – boosted overall returns. The improvement in the budgetary arithmetic is better than anticipated and the Government has revised its end-year deficit forecast to below one per cent of GDP. Despite the uncertainty that surrounds Britain's vote to leave the EU, Finance Minister Michael Noonan confirmed there is still fiscal space – scope – for €1 billion in spending increases and tax cuts in the October budget. And he predicted the Irish economy would be Europe's fastest growing for the third year in succession.
Clearly the latest exchequer figures do not reflect the fallout from the Brexit decision, as a slowing British economy now edges towards recession. Britain is Ireland's largest market and the impact of a downturn in the UK, as sterling weakens, consumer demand declines and investment decisions are delayed, will have a hugely negative effect on Irish exporters and on the domestic economy – albeit at a later stage. Mr Noonan has already cut his forecast for economic growth in 2017. But he may yet have to do so again.
The plan floated by Britain's chancellor, George Osborne, to cut its corporate tax rate (20 per cent) to less than 15 per cent is designed to influence companies considering the choice of re-locating to other parts of the EU or investing in Britain. Last March, Mr Osborne set 2020 as the target date for lowering the rate to 17 per cent. But whether he will remain as chancellor after the Tory party leadership election, and the consequent ministerial reshuffle, is uncertain. And whether any successor would honour his predecessor's personal pledge is even less certain. Nevertheless, it is an unwelcome development that will further aggravate Britain's relations with the EU. Hopefully, as Mr Noonan has suggested, it may be less "dramatic" than it sounded.
However, Ireland’s reliance on a low (12.5 per cent) corporation tax rate to attract foreign direct investment (FDI) – both for boosting employment and raising revenue – is underlined by the latest exchequer returns. Corporation tax (€2.67 billion) at mid-year amounts to some 12 per cent of tax revenue, of which some four fifths is accounted for by multinational companies. The importance of retaining the competitive advantage of a low tax rate is highlighted in a recent study by the Economic and Social Research Institute. It found that of all EU states, Ireland is most sensitive to changes in the corporate tax rate. Undoubtedly, a higher corporate tax rate would have an adverse impact on the State’s ability to attract FDI. A 15 per cent UK rate – should it materialise – would be a serious concern.