Government ‘missed opportunity’ not saving company tax windfalls, Ifac says

The Government would have been in a better starting position to deal with the coronavirus shock if it had used unsustainable corporate tax windfalls in recent years to run a larger budget surplus, or put more money into a rainy day fund, according to the acting chairman of the State’s fiscal watchdog.

The Irish Fiscal Advisory Council (Ifac) had warned consistently before the Covid-19 crisis that up to €6 billion of Ireland’s annual corporate tax take could not be counted on as being sustainable in the future, as it was driven by a small number of multinationals.

Speaking to reporters ahead of the publication on Wednesday of Ifac’s latest biannual Fiscal Assessment Report, the budgetary watchdog’s acting chairman, Sebastian Barnes, said the Republic “could have been running a much bigger surplus” in recent years.

“Or there could have been a lot more money in the Rainy Day Fund, had it been put in in the way that the council had advocated,” he said, referring to the fund that was set up late last year with an initial €1.5 billion transfer from the Ireland Strategic Investment Fund.

“In some ways that was a missed opportunity,” said Mr Barnes. “The main impact is that down the line the level of debt would have been lower, which would have been welcome, and maybe the adjustment needed would have been less as well.”

Ifac says a surge in State borrowings to deal with the crisis will see national debt rise by next year to between 114 per cent and 160 per cent of the size of the underlying economy – which excludes the activities of multinationals and is referred to as gross national income star (GNI*). That wide range, reflecting huge uncertainties about the drop-off in tax income and the spike in pandemic spending, compares to a ratio of just under 100 per cent last year.

Cushioned

Still, Mr Barnes said Government finances had been cushioned somewhat heading into the economic shock by the fact that its debt burden, relative to the size of the economy, had been falling rapidly in recent years, while there was at least some money in the Rainy Day Fund.

“Things would have been much worse had those things not been done,” he said.

Mr Barnes said the Government could be delivering a sizeable stimulus package to invest in areas that would drive up employment while at the same time starting early austerity measures.

“Those two things aren’t really inconsistent,” he said, adding that freezing public sector wages and welfare payments as well as keeping tax relief bands unchanged would save €2 billion.

Doubling carbon tax from €26 a tonne could raise €500 million in a full-year, the Ifac report also highlights.

“At this point it is important to keep all options on the table. Very difficult choices will have to be made,” he said, adding that any moves to delay planned increases to the pension age or rule out income tax increases “is going to make it much harder in terms of the remaining” options.

Key scenarios

The Ifac report looked at three key scenarios facing the economy: a mild scenario where lockdown measure are eased at pace and the economy rebounds quickly; a central scenario that’s built on Government forecasts that see the economy reopening in stages as planned; and a severe scenario of repeated lockdowns and wider financial stress.

“The scenarios imply that it could take between 2 and 3½ years to return to pre-crisis levels of activity depending on health outcomes. By contrast, the Irish economy took 11 years to recover after the financial crisis,” it said.

Mr Barnes said that while a faster unwinding of coronavirus restrictions than currently planned may reduce the financial stress of some businesses, reopening some areas of the economy ahead of schedule carries the risk of a second wave of infections. “That could lead us into the severe scenario, which would be a terrible outcome economically,” he said. “How you balance those risks is extremely difficult.”