The latest report from the Irish Fiscal Advisory council (Ifac) neatly sums up the difficulty of forecasting what happens next in the Irish economy. Facing significant uncertainties, most notably from the policies of US president Donald Trump, the economy could take a hit, or could hold on to most of the gains of recent years.
One thing is for sure, however. Ireland is relying ever more heavily on corporation tax. And the report from the budget watchdog suggests how the Government should respond. These recommendations are, by now, familiar, but that does not mean they should be dismissed.
The Government has, wisely, started to put cash aside in case of a downturn. And this should certainly help if any reversal was temporary. However, Ifac points to structural issues too – longer-term trends which need to be addressed. One, a common theme of these reports, is Ireland’s reliance on just a few major US companies for a significant amount of corporate tax revenue. When the part of corporate tax revenues relating to tax planning is factored out, Ifac estimates that the underlying budget position is in deficit.
There are also problems on the spending side of the budget, which have received little attention to date. Ifac criticises the Government for its budgeting for this year, saying that it failed to take into account overruns for 2024 which had increased the spending base. As a result, spending for this year could be €3 billion above budget, it estimates.
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Significant overruns have become common, but have been offset by tax also coming in ahead of target. Relying on this continuing is unwise. To combat this, Ifac calls for better spending control and a clear target – or anchor – for the level of spending increases which is then adhered to.
As the report points out, corporation tax could grow further, helping to underpin the public finances. But the risks, too, are obvious. Either way, the lack of control on day-to-day public spending is notable and does not suggest proper management, or a focus on value for money.
