Irish tax windfall paying for unsustainable spending - watchdog

The Government is still using windfall revenue from corporation tax to paper over cracks in its day-to-day spending, the State’s fiscal watchdog has warned.

In its first formal response to last week's budget, the Irish Fiscal Advisory Council (Ifac) said excess corporation tax receipts continue to "flatter" the Government's budgetary position and mask repeated and unsustainable increases in health spending.

"Without these exceptional corporation tax receipts, the budgetary position would not be balanced and the volatility of these receipts presents considerable risks," Ifac chairman Seamus Coffey said.

He also said the Government’s target of a small budget surplus of €600 million this year was “totally inappropriate” given the “enormous tailwinds” boosting the public finances in the form of additional corporation tax receipts and lower interest payments on the national debt.

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“Targeting a balanced budget is not an appropriate way to set fiscal policy,” he said. “ It leads to spending rising too fast in good times and can result in the need to make inappropriate cutbacks in a downturn,” Mr Coffey said.

Despite exchequer health spending being on or below profile every month this year, the Government last week announced a supplementary spending estimate for health of €350 million. This is likely to be covered by another record corporation tax take, which expected to be in the region of €11 billion this year.

Supplementary spending

He said the recurring pattern of supplementary spending in health needed to be stopped. The sector had been given significant additional resources which could have been spent elsewhere, used to fund tax reductions or build up the necessary fiscal buffers, Mr Coffey said.

While it is a positive that the 2019 overrun was included in the budget package, the expenditure ceiling needs to be adhered to for 2020 and credible medium-term ceilings need to be set.

Mr Coffey said the Government’s repeated failure to deliver on its budget plans undermined the budgetary process. He also warned that spending based on bumper business tax receipts represented a fiscal stimulus that the economy could ill afford.

“Spending that money as soon as it comes in is a boost to the domestic economy that is already operating close to its potential,” he said, while noting it came predominantly from a handful of big multinationals and their international activities.

His comments come in the wake of a report from the Department of Finance last week, which warned a major “shock” to Ireland’s corporation tax base could leave a €6 billion hole in the public finances.

Receipts from the business tax have more than doubled to €10 billion in the past five years, with nearly 50 per cent coming from just a handful of companies understood to include tech giants Apple, Google, Microsoft, Dell and Oracle.

Mr Coffey said Budget 2020 was more complicated than usual as it combined the impact of budgetary measures announced on the day but also significant changes in areas such as public-sector pay and capital spending which had been agreed previously.