Subscriber OnlyOpinion

Cliff Taylor: Despite the economic slowdown, the exchequer is now awash with cash

The latest figures show that the surge in corporation tax and income tax is continuing, though we may now have reached " peak tax”

Remember the “soft landing” promised for the economy back in 2008, perhaps the most triggering phrase from that period given the crash landing that ensued?

We saw the embodiment of the financial madness that took hold across the country in the Seán Quinn documentary during the week. By betting on Anglo Irish Bank, Quinn was pouring money into a gamble on the Irish economy and its commercial property market. Both went down and Ireland’s government finances were destroyed in a turnaround for small surplus into massive deficit within 18 months. Ireland has had a bit of a boom-to-bust economic cycle for many years, but this was the peak of it.

Now the economic cycle is turning again. So can we hope that some lessons were learned from the financial crash and what came after? Can we do the soft landing this time?

The latest figures from the Central Statistics Office show a small fall in the domestic economy in the third quarter, though the key indicator of consumer spending still grew a bit. The bounce back from Covid lockdowns is over. Growth is slowing and we can’t rule out a recession, even if the support of the stronger parts of the multinational sector may be enough to keep overall growth ticking over at a lower level next year.


Multinational profits

While economic growth is slowing, this it is not showing up in the exchequer figures, with an extraordinary surplus of €12 billion in the figures for the first 11 months of the year. This will fall back a bit in December, but the outturn for the year will – again – be way ahead of budget day expectations. Paschal Donohue leaves the Department of Finance this month as taxes and the budget surplus hit a record high.

These figures are a reflection of what has happened, rather than what is going to happen. Multinational profits will slow – and we are already seeing some tremors in the tech sector, most recently at Intel seeking volunteers for unpaid leave. Ongoing strength in the life sciences and pharma sectors and the end of tax reliefs on big intellectual property investments made after 2015 – meaning more of the profit reported here will be exposed to tax – may protect things a bit. But with employment growth and consumer spending slowing, we may well be at the peak of the current tax wave. Some economic retrenchment looks likely in early 2023, given the pressure on household finances and businesses – and this will show up in taxes.

The bumper figures will likely lead to new tensions in the Government, where other Ministers may well feel that the double act of Donohoe and Minister for Public Expenditure Michael McGrath – set to switch jobs shortly – were economical with their budget forecasts and used this to hold down the increase in spending. And, of course, the Opposition will increase their demands for more spending across the board in the light of the big surplus and the strong cash position of the exchequer.

There is no “right” answer in terms of how to manage the State finances for the next few years. A Government is not like a household, under pressure all the time to balance its books exactly. But with spending already set to rise by 6.8 per cent next year, extra resources are already planned – and a possible need to extend some energy supports for households and businesses next year can probably be accommodated within the current budget sums.

Frothy revenues

Above all, Ireland needs to break the boom-to-bust trend. We saw in 2008 how quickly the exchequer finances can turn and now we are again reliant on a few unpredictable revenue sources. The plan by Donohoe, to put a significant part of the frothy element of corporate tax revenues aside, looks wise. It gives some firepower for the future, especially if we are hit by a slowing economy and weakening tax trends at the same time – which is entirely possible.

It also gives a base from which to plan to meet urgent needs for the economy and society. Top of this list, looking beyond the cost-of-living crisis, is the need to maintain State investment and not get caught having to cut spending in this area again as growth weakens. Doing so after the financial crash has had a huge and enduring economic cost. Keeping investment high now could yield a big future return and, given that growth will slow and inflation – we hope – will ease, there may be scope to do so, without running the risk of stoking inflationary pressures.

Looking ahead, massive amounts will need to go on energy and climate change and dealing with an ageing population. And, as the latest figures show housebuilding activity falling, the State will have to step in here to provide additional funding as private sector activity is hit by higher interest rates. The State is going to have to pay a greater role in funding the rollout of new housing; better to do so in a way in which it retains control, rather than reviving early-2000 style tax breaks again and hoping the private sector delivers, as some in Government are arguing. Last time that strategy didn’t end too well.

Economic and public finance busts cost so much that State policy needs to have a bias towards some caution. This time around we don’t have a credit bubble or banks overly exposed to property, as was the case in 2008. We do look to be at “peak tax” now – even if the current momentum lasts a few more months. The case for not rushing to spend the excess now appearing is strong, because sooner or later the tax boom will run out of steam. In all likelihood, the froth will slowly come off the figures in the months ahead, changing the debate. But at least the public finances head into this in an unprecedentedly strong position. The important thing now is not to blow this advantage – and to keep investing for the future.