The government is over-reliant on "volatile and vulnerable" corporation tax revenues and should reduce reliance on such tax receipts at the current level by rebuilding the rainy day fund or paying down the national debt, the Irish Fiscal Advisory Council (IFAC) has said.
In its Fiscal Assessment Report, published on Tuesday, the Council said the war in Ukraine and spending pressures caused by high inflation were an immediate risk to the public finances, which will remain heavily reliant on corporation tax receipts to cover the cost of an ageing population, Sláintecare, transitioning to a low-carbon economy and defence spending.
Corporation tax receipts totalled €15.3bn last year, an increase of 24% or €3bn from 2020, reflecting the strength of exports and profitability among Irish-based multinationals in the IT and pharmaceutical sectors, and accounting for 22% of the 2021 tax take, or the same as VAT.
The top 10 paying companies account for more than half of corporation tax receipts, up from a quarter in 2008, and the Council recommended that the government take action to cap the amount of corporate tax revenue spent, adding that the government could have saved €22bn since 2015 by not spending what it considered to be "excess" tax.
In its response to the government's Stability Programme Update, published last month, the Council said the economy continues to growth, but high inflation has reduced expectations of real economic growth, and that risks of a global downturn and tighter financial conditions have increased, with Brexit and an "unwinding" of the Northern Ireland protocol potential causing trade difficulties.
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The watchdog said that the budgetary balance could improve on the deficit of -0.8 of gross national income (GNI) forecast by the government, with possible current and capital underspends and higher than forecast revenue "likely".
However, if the government were to fully offset price pressures by increasing wages and benefits, spending would outstrip the current forecast for the next 18 months and beyond.
If the economy continues to grow steadily and the government follows rules introduced last year to tie spending to economic growth, the budget balance should return to surplus in 2023 and reach a surplus of 2.7% of GNI by 2025, while debt is predicted to fall to under 80% of GNI by then.
The Council said that €2.5bn in unallocated contingencies are available to be spent on Ukrainian refugees and cost of living measures for the rest of the year.
Ultimately, the Council says the government faces a delicate balancing act in managing high inflation, protecting poorer households and delivering major policies, but the cost of adjusting welfare payments and public sector wages to higher inflation would leave no room for increases in spending elsewhere.
It added that the government will need to make choices between addressing inflation and managing its other priorities, suggesting that "a combination of carefully-calibrated and targeted supports and wage and welfare increases could help manage the current situation.
"The government cannot fully offset the cost-of-living increases for everyone. Better targeting support measures would help it stick to its plans," the Council said.
Commenting on the report, Sebastian Barnes, chair of the Irish Fiscal Advisory Council, noted: “Tax receipts have been boosted by a swift recovery and strong taxes, in part thanks to the massive support provided during the pandemic.
"But, the government now faces difficult choices. Supporting poorer households, keeping a lid on further price increases, and implementing other policies will be complicated in the short run.
"At the same time, more clarity is needed on how the government will deliver on its longer term goals while ensuring prudent management of the public finances.”
(Pic: Getty Images/Getty Images)
