Corporation tax: the gift that keeps on giving

The latest exchequer figures show no slide in business tax windfall

Experts have repeatedly warned that the corporation tax tide may soon go out, based as it is on the inherently unstable notion of corporate profitability.

Experts have repeatedly warned that the corporation tax tide may soon go out, based as it is on the inherently unstable notion of corporate profitability.

 

Five years ago there was a global outcry about multinational tax, and Ireland, which hosted so many of these companies and their elaborate tax-avoidance schemes, looked to be in an extremely vulnerable position.

The State was villified as a tax haven along the lines of the Cayman Islands. There were multiple warnings about the potential exodus of investment, a vital component of the economy, and the State’s coveted 12.5 per cent corporate tax rate was marked down as an endangered species.

Five years on and who could have predicted how this has played out in Ireland’s favour. The onshoring of intellectual property assets has contributed to a massive surge in corporation taxes. They generated a record €10.4 billion for the Government last year, €1.9 billion more than what had been expected. This was more than double the revenue generated from the business tax as recently as 2015.

Combined with a lower interest rate bill on the State’s national debt, the windfall has given the Government an additional €6 billion to play around over the past three years. Never has an Irish government had it so good.

Experts, however, repeatedly warn that this corporation tax tide may soon go out, based as it is on the inherently unstable notion of corporate profitability.

Specifically the Government has been cautioned not to use the extra dosh to fund day-to-day spending increases, which is what happened in the lead up to the crash, albeit with property-related taxes.

As a result pundits have been eyeing corporation tax receipts for months, looking for any signs of weakness, any sign the tide might be turning.

And apart from a moderate dip in receipts in May, most likely just a timing issue, there has been no sign. The Government has even been forced to up its projection for corporate tax for the year.

And the latest half-year exchequer numbers explain why. They show the business tax generated €4.2 billion in the six months to the end of June, marginally below expectations, but significantly 3.5 per cent ahead of last year’s record total.

So we remain in the grip of a corporate windfall. But not all are happy. The Irish Fiscal Advisory Council (Ifac) says the Government’s large corporate tax buffer is providing a convenient smokescreen for out-of-control Government spending, particularly in health.

The problem, it says, is that much of the additional health spend paid for last year with the additional corporate tax receipts was in recruitment, which is likely to be permanent, while much of the corporate tax bonanza is tied into the buoyant economic conditions internationally, which may soon end.

Inside budget

The latest exchequer returns, however, set health spending in a better light than most would have expected. Amid reports of further spending overruns, the figures show current health spending amounted to €8.4 billion over the six-month period, which was broadly inside budget.

Department of Finance officials noted that only €630 million of the additional €1.1 billion spend earmarked for this year has so far been used. At the same stage last year the Government had already burnt through nearly all the additional money earmarked for 2018, which resulted in a significant end-of-year overrun and a supplementary estimate.

So while health might again breach its budgetary ceiling, it appears, at this stage anyway, it won’t be as bad as last year.

And this suggests there may be scope for a slightly more generous package of spending and tax measures in October’s budget provided Brexit doesn’t derail everything.

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