Warning comes on using ‘windfall taxes’ for day-to-day spending

The Government has again been warned against using “windfall taxes” to fund public services similar to what occurred during the boom.

Irish Fiscal Advisory Council chairman Seamus Coffey said some €2–€6 billion of the €11 billion in corporation tax forecast for this year could be classified as "excess".

“By excess we mean beyond what would be expected based on the economy’s underlying performance and historical or international norms,” he said.

Mr Coffey and other members of advisory council were appearing before the Oireachtas Committee on Budgetary Oversight to discuss the advisory council's most recent assessment of Government budgetary policy.

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“The increased reliance on corporation tax for funding public services and supports leaves these exposed to potential reversals,” said Mr Coffey.

He highlighted "concentration"– the fact that a handful of multinationals, including Apple, Google and Microsoft, pay the lion's share of business tax receipts – as a key risk.

“This concentration, coupled with the fact that 80 per cent of receipts are understood to be accounted for by foreign-owned multinationals, means that the underlying tax base is more prone to idiosyncratic shocks and that the tax base is likely to be more mobile in nature,” said Mr Coffey.

He also warned that a certain proportion of corporation tax was at risk from the Organisation for Economic Co-operation and Development’s proposals to reform that international tax system, which sought “to allocate more tax to market countries”.

How to safeguard public finances?

The advisory council's Martina Lawless said it was unsustainable to rely on windfall taxes to fund day-to-day spending. She cited the experience of the Irish government in the led up to the 2008 crash.

The former government had become increasingly reliant on VAT receipts from the property sector, which vanished after the crash, leaving a major hole in the public finances.

The advisory council warning comes as the latest exchequer returns show the Government took in a record €3.1 billion in corporation tax last month and is on course for a record €11 billion this year.

The council recommended using the so-called rainy day fund to save the “excess” business tax receipts. It also advocated “guiding net spending with sustainable growth rates informed by alternative estimates of potential output; and establishing meaningful debt ratio targets”.