More sustained IT downturn would have ‘severe implications’ for public finances, department warns

A “more sustained downturn” in the global IT sector would have “severe implications” for the public finances, the Department of Finance has warned.

In its annual taxation report, the department said the State’s tax base had become increasingly concentrated around “a few key sectors” and that up to €11 billion of last year’s corporation tax revenue should be treated as “potentially transitory”.

The report noted that the wider IT sector here, which includes tech services as well as tech manufacturing firms, last year accounted for almost €12 billion (14 per cent) of total tax receipts.

A spate of high-profile lay-offs in the sector linked to overexpansion during the pandemic “have highlighted the reliance of the public finances on tax receipts paid by these firms,” it said.

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The reported that the IT job losses – up to now – “largely reflected a correction in staffing numbers and a return to ‘normality’ following unduly optimistic levels of hiring during the pandemic”.

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However, it warned that “should there be a more sustained downturn in this sector there would, accordingly, be severe implications for the public finances”.

In its report, the department noted that tax revenues have grown strongly since the pandemic with receipts amounting to a record €83.1 billion in 2022.

This was almost €24 billion (40 per cent) above pre-pandemic levels, it said.

“Perhaps the single most notable trend in Irish tax revenues over the last several years has been the rapid growth in corporation tax receipts linked to the highly profitable multinational sector,” it said.

Corporate tax receipts last year – at €22.6 billion – were more than double their pre-pandemic level and have increased five-fold in a decade, it said.

The department cautioned, however, that much of this – approximately €11 billion or almost half of the total last year – is “potentially transitory in nature, and should be treated as windfall”.

It warned that the business tax base was doubly concentrated around a handful of large multinationals (just 10 firms accounted for 57 per cent of receipts) and across “a small number of key sectors” with the pharmaceutical, manufacturing and ICT sectors “driving the large majority of growth”.

“An important corollary of this is that any shock impacted on the multinational sector could have a detrimental impact on this revenue stream with a direct read-across to the public finances,” it said.

The Government, the department said, had acted to mitigate the risk of an overreliance on vulnerable corporate tax receipts by committing part of the windfall to the National Reserve Fund and outlining proposals for a longer term savings vehicle.

Launching the report, Minister for Finance Michael McGrath said the report “highlights that, while the headline figures are undoubtedly positive, there are still real vulnerabilities beneath the surface.”

“This provides a timely reminder of the importance of taking the appropriate policy decisions today to secure the future of the public finances,” he said.