The Government’s latest Stability Programme Update (SPU), published this week, may have shown that its forecast surplus for this year will amount to €10 billion, 67 per cent higher than expected, amid buoyant tax revenues. However, a key component of non-tax revenues for well over a decade – money handed over from Central Bank super profits in an era of cheap money – is falling rapidly.
Nestled deep in the SPU report is a projection that payments to the Exchequer from the Central Bank of Ireland will amount to €500 million this year. That would be less than half the €1.07 billion handed over in 2022, based off the authority’s earnings for 2021.
The Central Bank, which is obliged to pass on 80 per cent of its profits to the exchequer each year, generated more than €23 billion of profits in the 13 years since 2008, driven by the response of central bankers in Dublin and Frankfurt to the near collapses of the domestic banking system and the euro, and a decade of anaemic inflation across the euro zone.
Some €18.4 billion was transferred to the government over the period, cushioning the blow after taxpayers were forced to commit €64 billion to rescue the banking system and successive governments sought to narrow budget deficits. Indeed, the €2 billion-plus handed over by the Central Bank in both 2018 and 2019 made all the difference in the only two years that we saw budget surpluses between the financial crash and the Covid-19 pandemic.
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The profits were initially driven by interest on emergency loans to banks during the financial crisis. They have also been fuelled by multibillion euro gains on the sale of government bonds used in 2013 to refinance the bailout of the Irish Bank Resolution Corporation (IBRC), interest on bonds acquired under European Central Bank (ECB) quantitative easing (QE) programmes, as well money made from charging commercial banks negative rates for excess deposits stored with the central bank.
However, the Central Bank is now down to its last €1.5 billion of IBRC-linked bonds and a surge in ECB rates since last July – to tackle soaring inflation – means the Liffey-side institution is now paying 3 per cent interest on tens of billions of euro in surplus deposits stored by the banks with it. Rising rates have is also hitting the carrying value of bonds on central bank balance sheets.
The SPU said that the Central Bank is unlikely to record surplus income in 2023 – meaning transfers will amount to zero next year.
