The UK and Norway both discovered vast quantities of oil and gas in the North Sea in the 1970s. The two countries, however, used their newfound wealth in entirely different ways.
In Britain, in the 1980s, when the energy revenues began to flow, prime minister Margaret Thatcher used them to cut taxes. Alongside a major programme of privatisation, she made large cuts to income taxes aimed at revitalising an otherwise stagnating UK economy.
Revenues from oil and gas in the UK jumped from £565 million in the 1978-1979 tax year to £2.3 billion in 1979-1980 and to more than £12 billion in 1984-1985. While Thatcher succeeded in restoring growth and making the UK a more competitive economy, critics argue her policies were economically polarising.
If Thatcher was a free-market zealot, the Norwegians were the opposite.
They taxed energy companies heavily and took a 50 per cent stake in each production licence (the UK government had no direct participation). The Norwegians also set up their own state oil company Statoil to compete with these companies.
While Thatcher was busy privatising, the Norwegians were busy nationalising.
And instead of spending the money, they set up a sovereign wealth fund to save and invest it, and – this is important in an Irish context – to keep it away from the clutches of government ministers, who might have been tempted to weave it into their day-to-day spending plans.
While the UK’s oil and gas wealth has seemingly disappeared into the budgetary ether, Norway has the largest sovereign wealth fund in the world, worth about $1.4 trillion (€1.3 trillion). The fund owns 1.5 per cent of all globally listed shares and has generated a return $143 billion so far this year.
Valuable lesson
The contrasting experiences of the UK and Norway provide a valuable lesson for Ireland, which is embarking on its own windfall journey with excess corporation tax receipts.
Comparing Ireland’s tax largesse with the gigantic oil and gas revenues generated by the UK and Norway might have seemed a bit overblown few years ago but it’s less so now.
The Department of Finance is expecting the Government to generate €65 billion in budgetary surpluses between 2023 and 2026 largely on the back corporate tax receipts. It expects corporate tax receipts to hit a record €24.3 billion this year, a quarter of all tax income.
But the department’s forecasts are extremely conservative and there are two big shifts coming in the world of corporate tax that are likely to work in our favour.
Next year, the first phase of the OCED-brokered tax reforms involving a new global minimum rate of 15 per cent comes into effect. While the companies won’t officially be liable for the bigger rate until 2026, it will be backdated to 2024. That means 2026 has the potential to see another step change in receipts here, on a par with 2015.
Doubly so because the rate jump isn’t from 12.5 per cent, the Republic’s current rate of corporation tax, to 15 per cent as it appears on paper. The OECD reforms specifically state that the 15 per cent must be the minimum effective rate. Currently, the effective rate here, what firms actually pay after deductions and allowances, is about 10 per cent, so the increase – in many instances – will be five percentage points.
What we do with this money is perhaps the most important policy decision facing the Government
And there’s another factor likely to drive tax receipts post 2026. The mass onshoring of IP (intellectual property) here after 2015 was done so with large capital allowances, most of which expire in the second half of this decade, meaning more tax revenue for the Irish exchequer.
All things being equal and mindful of the concentration risk of having just 10 firms responsible for 60 per cent of the receipts, Ireland’s corporate tax take is likely to keep accelerating in the medium term. Insiders say it could be well north of €30 billion by the end of the decade. This means the State could be accruing €20 billion in windfall taxes annually in less than three years. Of course the label windfall can’t be used indefinitely.
What we do with this money is perhaps the most important policy decision facing the Government. It has the potential to transform the infrastructural deficits that plague this country, particularly the ones that sit at the centre of our housing and health problems.
Minister for Finance McGrath’s plan for these excess receipts is still being formulated but he has signalled he will establish two funds: a new public investment fund to bolster capital spending on vital infrastructure and a sovereign wealth fund along the lines of the Norwegian one.
The first will be aimed at underpinning investment in areas such as housing and infrastructure, the second will be a longer-term vehicle perhaps aimed at paying future bills in areas such as pensions.
How much of the excess receipts will be siphoned off, where the money will be invested and, crucially, whether the funds will be put beyond the reach of day-to-day politicking remains to the seen.
The Cabinet is said to be considering moving as much as €8 billion into housing via the State-controlled Land Development Agency as part of a fresh push to boost the supply of social and affordable homes. The idea of using the wealth fund to address the looming pensions issue instead of increasing social insurance rates, as advocated by several bodies, appears to be politically motivated.
It’s crucial we get this right. Will it herald a step change in our economic fortunes or sink into history as a wasted opportunity?
