Irish fiscal watchdog urges `prudence account’ for corporate tax windfall

June 11, 2019

By Graham Fahy

DUBLIN (Reuters) – The Irish government should set aside part of its corporate tax revenue, because the high levels of revenue are temporary and ought not to be used for current spending, the state’s fiscal watchdog said on Tuesday.

In its mid-year report, the Irish Fiscal Advisory Council said 3 billion to 6 billion euros of the 10.4 billion euros raised by corporate taxes in 2018 cannot be explained by the underlying performance of the economy and should be considered excess.

The council recommends that the government assign above-forecast corporation tax to “a prudence account” as it is collected, to limit the government’s scope to use the windfall for more spending.

At the end of the year, any surplus in the “prudence account” would be transferred to a “rainy-day fund”, which could be used to offset an economic downturn or external shocks.

“Looking at these corporation tax receipts … given the uncertain nature of them, and the fact they have been used to mask spending increases, something needs to be done,” Seamus Coffey, chair of the council, told reporters.

“We’ve had the wind at our backs for the last couple of years, but that can’t be expected to last forever,” Coffey said.

The Irish Fiscal Advisory Council was set up after years of reckless spending left the Irish exchequer hugely exposed when the 2008 financial crisis hit. It is mandated to assess whether the government’s fiscal stance each year is prudent.

Ireland has been Europe’s best-performing economy since 2014, but it depends on a small number of multinational companies for corporate taxes, which are volatile and vulnerable to change with the global business cycle.

Ten companies accounted for almost half Ireland’s corporate tax receipts in 2018.

In recent years, Ireland has loosened its grip on spending as the economy recovers from the financial crisis. Unbudgeted increases in spending, mainly on healthcare, pushed annual spending growth to 6.7% in 2018, up from 4.5% in 2015.

According to the report, Ireland’s economy is performing at almost full capacity and could be at risk of over-heating. It is also vulnerable to a shock from a harder-than-assumed Brexit.

The Irish government’s forecasts assume the United Kingdom makes an orderly and agreed exit from the European Union at the end of 2020.

But a disorderly Brexit could wipe out 4 percentage points of economic growth, hitting public finances and requiring trade-offs as the government is forced to cut spending or raise taxes to prevent debt ratios rising indefinitely, the report said.

(Reporting by Graham Fahy; editing by Larry King)

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