Trying to interpret trends in the Irish economy is always controversial given the distortions to our data caused by the presence of major multinational players. The National Competitiveness Council and the National Treasury Management Agency warned last week about our reliance on the sector. Other expert economic voices agreed that the influence of multinationals was significant but argued it should not be overplayed.
There are a lot of aspects to this subject which are worth teasing out to identify Ireland’s true exposures. However there is no debate on one issue. Big multinationals are key contributors to our tax coffers, with ten major players responsible for some €4 in every €10 of corporate tax revenue. And corporate tax has been the key overperformer in the exchequer arithmetic in the last few years. The trend is continuing with this tax running almost 10 per cent ahead of target so far in 2018.
Tax receipts from the major players are welcome, of course, and Ireland has done well from the international restructuring undertaken by some of the big companies in recent years. However as last week's reports warned, international tax reform raises questions about the sustainability of this trend and of the related surge in inward investment. It would be a mistake to bank on the rapid growth in corporate taxes continuing. Instead, we need to build in some leeway in case it eases off or even declines.
At the current stage of the economic cycle, and facing Brexit uncertainties as well as the questions about corporation tax, budgeting for a surplus is the sensible thing to do
Minister for Finance Paschal Donohoe promises to do this next year via the creation of a rainy day fund. Though this is welcome, he should go further. As the Central Bank pointed out in its recent quarterly bulletin, there is clear scope to move the exchequer finances into surplus in 2019 rather than planning to continue borrowing, even if the sums involved are low.
At the current stage of the economic cycle, and facing Brexit uncertainties as well as the questions about corporation tax, budgeting for a surplus is the sensible thing to do. It still allows room for a significant increase in spending next year, including provision for the State’s new programme of investment. It is important to remember that total expenditure is rising fast, up 7.3 per cent year-on-year in the first seven months of 2018. We are already spending a lot more and obtaining value for money is vital.
The Government is facing difficulty in getting these messages across at a time when strong growth has fuelled expectations and there are already suggestions about where extra money should be spent. We are told that the political “reality” requires a generous budget. But there is an economic reality too and it is that we are at the top of the growth cycle and facing increasing uncertainties. We need a budget – and a strategy – that reflects this.