Alan O’Reilly is a political activist based in London.
It is fair to say that the Irish economy has rebounded well from the Covid-19 pandemic. Unemployment remains low, and consumer spending continues to go up driving higher returns in VAT receipts; in April, Ireland announced that it is likely to see record tax receipts for 2023.
However, it is corporation tax that is at the centre of this huge increase in tax returns.
Receipts have rocketed over the last decade. But since the pandemic, they have hit record highs, rising 30 per cent year-on-year in 2021 and another 48 per cent in 2022, to a record €22.6bn. It is expected that corporation tax receipts for 2023 will surpass 2022’s record of €22.6bn.
To put this in context, Irelands corporation tax revenue for 2022 is 182 per cent more than it took just five years ago.
A key element of Ireland’s inward investment strategy has been to create a business-friendly environment to attract large US multinationals – the centrepiece of which is, of course, a 12.5 per cent corporate tax rate.
While critics are often quick to criticise this approach as being the only pillar, there are a wider range of reasons for businesses locating in Ireland, such as business friendly environment, big labour pool and close links to both the UK and the EU.
(Interestingly Ireland does not have the lowest rate in the EU, Hungary and Bulgaria are lower while Cyprus also have a 12.5% rate).
In any event, this particular competitive advantage is likely to weaken soon. Under OECD rules to be introduced in the coming years, OECD members must have a 15 per cent minimum rate of corporation tax.
This is not likely to dent Ireland’s receipts in the short term: forecasts suggest that by 2026, she will have budgetary surpluses totalling €65 billion over four years – potentially hitting 6.3 per cent of gross national income.
Ireland is amassing a huge windfall of tax receipts. The vexed question is: what to do with them?
Treasury officials believe that much of this money may be counted as a windfall. That means that its long-term viability cannot be taken for granted. Michael McGrath, the finance minister, has thus proposed setting up a sovereign wealth fund. This would allow Ireland to invest in capital projects whilst protecting these windfalls, and benefitting from them, over the long term.
The Department of Finance published a scoping paper as how this could work, looking at countries such as Norway, the United Kingdom, Australia, and others. It set out a approach similar to Norway’s, which would protect the capital while making money available for other investments.
Such proposals are not a particularly new in Ireland; In 2001, the government established a reserve fund to manage the huge receipts resulting from the Celtic Tiger. But this fund was essentially gutted following the 2008 economic crisis.
Echoing debates in Britain about pensions and social care, it is proposed that much of this new fund would go to help defray the long-term costs of Ireland’s aging population.
However, there remains a debate about this approach. Ireland still has a housing crisis that shows no sign of abating, and investment in infrastructure is being touted as a way of helping to further develop the Irish economy in the here and now.
All prudent options. Yet the question of how to spend these budget surpluses (certainly a nice problem to have) is a thornier one for the government.
With an election looming by no later than 2025, will ministers be able to resist the temptation to try and boost their standing with the electorate through giveaways? With Sinn Féin reaping a political dividend from the housing crisis and broader dissatisfaction with the economy, the pressure to cash in now is likely to grow between now and polling day.
For now, the key finance ministers are preaching prudence and the long-term national interest. Whether their colleagues let them hold that course – especially if there’s an earlier-than-expected election in 2024 – remains to be seen.