Common corporate tax base would seriously hurt Ireland - ESRI

Think-tank says foreign banks may be needed to satisfy demand for mortgages

The December economic outlook uses Cosmo to model the impact of growing Irish housing demand on the banking sector. It suggests demand for new housing units will increase from 24,000 annually currently, to 30,000 by 2024. File photograph: Getty Images

The December economic outlook uses Cosmo to model the impact of growing Irish housing demand on the banking sector. It suggests demand for new housing units will increase from 24,000 annually currently, to 30,000 by 2024. File photograph: Getty Images

 

The introduction across Europe of a common corporate tax base, known as a CCCTB, would seriously damage Irish investment flows, staunch the State’s tax revenues and spark a swift rise in unemployment here, according to the State-backed economic think tank, the ESRI.

Using for the first time a sophisticated new economic modelling system known as Cosmo (core structural model), the ESRI in its December economic outlook released today predicts that the introduction of a CCCTB could wipe 1.5 per cent off Irish economic output.

The flow of foreign investment into the State would fall by about 5 per cent if a CCCTB regime was introduced, the ESRI predicts, while Irish corporation tax revenues would fall by about 5.5 per cent.

The Government is fiercely opposed to the introduction of a CCCTB in Europe, which is an idea being pushed by some other nations, notably France, to standardise the way taxable profits are calculated, without touching tax rates.

Biggest beneficiary

It would essentially force multinationals to apply Ireland’s low 12.5 per cent rate to a smaller proportion of their income. The ESRI report suggests France would be by far the biggest beneficiary of a CCCTB, with a 6 per cent boost to its corporation tax revenues.

The December economic outlook also uses Cosmo to model the impact of growing Irish housing demand on the banking sector. It suggests demand for new housing units will increase from 24,000 annually currently, to 30,000 by 2024.

The ESRI concludes that foreign banks may need to re-enter the market here to quench the growing thirst for fresh mortgage lending. It concludes that Irish banks will not, by taking in more deposits, have the firepower to meet the demand for new mortgages.

The report suggests that house prices will rise by 7 per cent annually over the next two years, and 5 per cent a year thereafter in the medium term. It says an additional €50 billion of new mortgage lending will be required by 2024, but that Irish banks are certain to hit a “significant funding gap”.

The baseline (no more shocks) projection for economic growth under Cosmo is that the economy will expand by 3 per cent anually over the medium term.

The ESRI also predicts a marked increase in women in the workforce and that unemployment will fall to about 6 per cent in the medium term.

Under the baseline scenario, wage growth would be 3.7 per cent between 2016 and 2020, and 2.5 per cent annually in the five years after that.

However, the ESRI also assesses the effect of Brexit on the Irish economy in coming years, especially its impact on foreign direct investment (FDI).

Hard Brexit

Assuming Britain does a so-called “hard Brexit” – essentially that it leaves the European common market and accepts tariffs – after 10 years this would have knocked 3.8 per cent off the value of Irish output, according to the ESRI.

A hard Brexit would, after 10 years, have reduced wages in Ireland by 3.6 per cent, and unemployment would be up by almost 2 per cent. The figures would be far less severe if Britain opts for a so-called “soft Brexit”, says the ESRI.

A hard Brexit would, however, provide a boost to Irish FDI, the economic outlook concludes. The value of foreign investment in this country would rise by about 7.3 per cent over 10 years, the ESRI predicts, as the State captures investment diverted from the UK.

This would increase the value of total FDI stock in the country by €22 billion over a decade.