The government will this week be told by the state’s fiscal watchdog that it should direct billions of euros in corporate tax revenues into a “prudence account” rather than spending it on services or tax cuts.
The recommendation is contained in a draft of the June report of the Irish Fiscal Advisory Council (Ifac), which has been seen by The Irish Times.
The council argues that the windfall in corporate tax revenues, which has meant unanticipated billions pouring into the exchequer in recent years, may be only temporary and should not be used to fund current expenditure.
Under its suggestion, any corporate tax revenues above a level which is forecast at the beginning of the year should be allocated to the “prudence account”. This would, at the year end, be turned over to the rainy day fund used to pay down debt, or set aside for another purpose.
The council cautions that risks arise from how the Government might use the income. It adds that the administration could be exposed if companies changed tax structures or are targeted successfully by international efforts to reform the multinational tax system.
The council, which is led by UCC economist Séamus Coffey, argues that a total of €12.3 billion could have been set aside and used as a buffer when the economy slows down if the prudence account had been deployed in recent years.
Minister for Finance Paschal Donohoe has previously made commitments that the tax surge will not feed into day-to-day spending and that some of it will be diverted to the rainy day fund. However, the council argues that while "these solutions make sense in principle, it has been difficult for the Government to commit to them and, indeed, it has not done so thus far".
Pursuit of fiscal rectitude
The report states that upward revisions to spending, for example in health, “suggest that much of the unexpected receipts are being used to fund additional expenditure rather than being set aside.”
While accepting that the Government’s rainy day fund is a good solution “in principal”, it notes that annual contributions to the fund have halved from their original target of €1 billion. Moreover, fixed payments “fail to allow for saving of additional cyclical revenues”. The council suggests that governments should effectively lose the power to spend excess revenues, by mandating that unexpected windfalls should go into the prudence account.
The report notes that if revenues had been diverted into such an account in recent years, a larger exchequer deficit would have been recorded as it “would not have been masked by surprise corporation tax receipts”.
The exchequer deficit would have been €4.6 billion last year rather than recording a marginal surplus.
