At the height of the Celtic Tiger era in 2006 when the exchequer was awash with property-related tax receipts, the then government reported a budget surplus of €5.1 billion. This year the Government’s budget surplus or general government balance is expected to be almost double that at €10 billion.
On the basis that spending increases are limited to 5 per cent, as per the Government’s spending rule, and there being no major shock to the public finances, it will rise to over €16 billion in 2024; to €18 billion in 2025; and to nearly €21 billion in 2026.
The budgetary largesse is entirely driven by windfall corporate tax receipts, which generated €22.6 billion last year and are expected to generate €24 billion this year. That’s approximately €5,000 for every man, woman and child in the country.
Budget deficit
Remove them and we would be running a budget deficit of €1.8 billion this year and a budget deficit for the 15th consecutive year.
As Minister for Finance Michael McGrath said at the launch of the Government’s latest Stability Programme Update (SPU) yesterday, the public finances are in “a sweet spot”.
Up to last September the Department of Finance estimated that €4 billion to €6 billion of corporate tax receipts could be defined as “windfall” — in other words potentially temporary, not to be relied on into the future and more importantly not to be tied into current spending.
However, the department’s windfall estimate was upped €10 billion late last year on the back of a surge in receipts. In the SPU, the windfall element was put at €12 billion. The extraordinary surge in business tax receipts is barely understood.
Corporation tax boost/Have we reached peak house prices?
It’s probably a reflection of increased multinational profitability and the exhaustion of various capital allowances, which result in more taxes being paid. Between 2015 and 2021, Ireland’s corporate tax base grew by about 125 per cent, from €6.87 billion to €15.3 billion. Over the same period, the pretax profits of 33 large US multinationals with operations in Ireland grew by the same percentage.
Just as the conversation back in the heady Celtic Tiger days switched from one of whether the government finances were performing to what should we do with our budgetary largesse, the same is happening now.
New fund
The Government’s original plan to put a portion of the excess receipts in a rainy-day fund — some €6 billion has already been transferred to the National Reserve Fund — now seems decidedly unambitious and unstrategic.
Minister for Finance Michael McGrath says he’ll publish a scoping document in the next few weeks laying out plans for a new sovereign wealth fund, possibly along the lines of the former National Pensions Reserve Fund.
The Government’s controversial decision not to increase the State pension age has added to the pensions time bomb at the heart of the public finances. The State’s ageing population is expected to cost an additional €7 billion to €8 billion in “standstill” costs by 2030. “In recognition of this, a complementary policy will shortly be proposed by the Minister for Finance, namely pre-funding a portion of these costs via a longer-term public savings vehicle,” the SPU said.
