Government is in danger of being blinded by the tax windfall

Ten years ago this month, the then government’s year-end exchequer returns read like a horror story.

Tax revenue was down €8 billion to €41 billion. The global financial crisis and a homegrown property crash had triggered an unprecedented slump in activity.

At the same time the government’s budget deficit, the difference between what it spends and what it takes in in tax, had ballooned to nearly €13 billion as the tide in several property-related taxes went out. An international bailout and a four-year exile from the bond markets was to follow. No one bar a few contrarian economists had predicted a collapse of this magnitude.

Five years later, in 2013 with the economy mired in recession and unemployment tipping 16 per cent, no one predicted the rapid turnaround that was to follow.

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Receipts

No one predicted that unemployment would fall to 5 per cent within five years or that corporate tax receipts would more than double to more than €10 billion on foot of a global outcry against corporate tax avoidance, turning a sequence of 10 annual budget deficits into a surplus.

Our recent economic history has been so volatile, so unpredictable, that the only thing we can bank on is that the current outlook, the current suite of forecasts, won’t hold.

Therefore it is not nitpicking to burrow down into what looks like a relatively healthy set of exchequer numbers and wonder if the current buoyancy is more than just temporary manifestation of the cyclical. The experience of the last decade necessitates it.

Minister for Finance Paschal Donohoe noted that all major tax heads, bar excise duty, were up year on year and that the €55 billion generated in tax last year was 8 per cent up on 2017.

Income tax, buoyed by employment, generated €21 billion, up 6 per cent on 2017. VAT, meanwhile, the ultimate barometer of consumer wellbeing, brought in €14 billion, up 7 per cent on the previous year.

And of course the runaway train that is corporation tax generated €10.4 billion, €2.2 billion or 27 per cent up in year-on-year terms.

But is the current budgetary strength a product of dumb luck or a reflection of prudent fiscal management?

Critics such as the Irish Fiscal Advisory Council say the large corporate tax buffer – which has arrived all of a sudden – is providing a convenient smokescreen for out-of-control Government spending.

Policy

In response to the latest figures, it tweeted: “Today’s @IRLDeptFinance figures show a welcome Exchequer surplus. However, it is partly due to unanticipated events rather than policy intentions.”

In its report last month, the council homed in on the €4.5 billion spending hike allowed for in Budget 2019, noting that this was well beyond the €3.5 billion it had judged appropriate and and out of line with the long-run growth trajectory of the Irish economy, typically put at 3 per cent before inflation.

The Government says it cannot turn a “blind eye” to pressing needs in housing and health and is attempting to address this issue while maintaining fiscal probity –a standard response. Repeated breaches of its spending targets suggest otherwise, however.