Over half of Government’s corporation tax receipts might be ‘unsustainable’

Central Bank warns volatility of corporation tax and its concentration now pose major threat to public finances

As much as €8 billion or just over half of the Government’s corporation tax receipts might be “unsustainable” or at risk, the Central Bank has warned.

In its latest quarterly bulletin, the regulator said the volatility of corporation tax and its concentration among a small number of multinational firms was now one of the chief threats to the public finances.

It noted that receipts from the business tax swelled to a record €15.3 billion last year, which was 40 per cent up on the 2019 figure, while half the receipts came from just 10 large companies creating “a considerable concentration risk”.

The Central Bank calculated that if the business tax base had grown in line with underlying economic activity here, some €8 billion of the receipts collected last year might not have been realised.

“The difference between this Central Bank of Ireland estimate and the actual corporation tax out-turn can be considered a measure of windfall revenues and may also be instructive in providing an estimate of how much of the recent inflow could be considered as potentially unsustainable,” it said.

The regulator warned that were some of these large companies to relocate for tax purposes, or in the event of adverse shock to specific large sectors such as ICT or pharmaceuticals, there could be a significant negative impact on the Government’s fiscal position.

“The reason for this is that all of the increase that has been recorded up to this year has been allocated to permanent expenditure,” Mark Cassidy, the Central Bank’s director of economics, said. “If there was a reversal, it would be very hard to replace that sort of finance.”

Earlier this week, the Government signalled in its Summer Economic Statement that it was likely to run a budget surplus this year of about €2 billion. However, it noted that this was largely driven by excess corporation tax receipts and that without them it was likely to record a deficit of about €7 billion.

The Government’s statement highlighted “a clear vulnerability for the public finances” from the “concentration risk” of 10 multinational firms now paying half of all corporation tax and one in every €8 collected in tax.

The Central Bank advocates putting the additional revenue from the business tax into a rainy day fund, a plan the Government has repeatedly deferred.

In its latest bulletin, the regulator revised up its forecast for consumer price inflation due to further increases in energy prices, suggesting price growth would hit over 10 per cent in the coming months, placing further pressure on household budgets.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times