The Irish Times view on the economic outlook: The corporate tax risks

Old approach of spending money when it is there is not the way forward

Irish Fiscal Advisory Council (IFAC) estimated that between €2 billion and €6 billion of the corporate tax revenue could be considered difficult to explain by economic fundamentals. Photograph: Alan Betson

Irish Fiscal Advisory Council (IFAC) estimated that between €2 billion and €6 billion of the corporate tax revenue could be considered difficult to explain by economic fundamentals. Photograph: Alan Betson

 

Another economic report and another warning about the reliance of the Irish exchequer on potentially volatile corporate tax revenues.

The value of the latest assessment from the Economic and Social Research Institute (ESRI) is not in any new insight into what revenue might be lost, as here it takes the latest data from the Irish Fiscal Advisory Council (IFAC). It is rather in its working through of what losses on this scale might mean for the economy.

The IFAC estimated that between €2 billion and €6 billion of the corporate tax revenue could be considered difficult to explain by economic fundamentals. This is very much an inexact science, as can be seen by the breath of the estimate.

There may be positives in future years as well as risks. That said, the rapid pace of corporate tax revenue growth and the reliance on the fortunes of around 10 companies to contribute almost half of the total does create an obvious danger.

From what we know we simply can’t predict what might happen

The calculations by the ESRI demonstrate how serious this could be. Even a moderate hit – to the tune of around €2 billion – could quickly move the exchequer into deficit and increase the debt burden.

A loss of around €6 billion could create even more serious problems, leading to an immediate large deficit, the need for new taxes or spending cuts and slower growth.

GDP would take a very sharp hit, equal to more than two per cent of GDP in the first year under the more benign scenario, or more than 7.5 per cent in the case of a major hit.

These are not forecasts. From what we know we simply can’t predict what might happen to these revenues. But there are dangers there and the ESRI underlines them. The sensible approach is to put more cash aside and not use any excess for ongoing spending – to date too much of it has gone in this direction.

With a general election in the offing, it will be interesting to see how the parties address this issue in their budget proposals. The old approach of spending money when it is there is not the way forward when there is a risk that some of it may disappear.

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