ESRI steps up warning over corporation tax

A relatively small falloff in windfall corporation tax receipts would deliver an outsized and longstanding hit to government finances, the Economic and Social Research Institute has warned.

ESRI steps up warning over corporation tax

A relatively small falloff in windfall corporation tax receipts would deliver an outsized and longstanding hit to government finances, the Economic and Social Research Institute has warned.

The latest warning from the think tank will add to concerns that a large part of Government’s current spending commitments for years to come depends on buoyant receipts from company profits which could quickly unwind.

In its latest quarterly report, the ESRI said even a “moderate” fall of €2bn in annual revenues from the tax source would lead to a slowdown in economic growth, a rise in government debt levels, and increased costs of borrowing for the State for many years.

And a “sharp” fall in corporation tax receipts of €6bn would in time send Irish debt levels soaring back up to 84% of GDP, equivalent to 138% of the underlying size of the economy.

Other economists, including budget spending watchdog, the Irish Fiscal Advisory Council, have warned the Government against spending the huge windfalls collected from the profits of multinationals that are not tethered to the performance of the Irish economy.

Corporation tax receipts have swelled from an annual €4.3bn six years ago to €10.4bn in 2018, and are on course to set a new record this year implying “that a potential reversal of the recent windfall elements of corporation tax receipts poses a significant risk for Ireland”, according to the ESRI.

Its new analysis sees economic growth cooling next year — GDP will expand at 3.3% in 2020, down from growth of 5.8% this year — as the global economy suffers from the fallout of the US-China trade spat which has damaged growth in China itself.

Still, the Irish economy will perform strongly next year, as employment grows to over 2.35m and unemployment falls to an average of 4.6% in 2020. Average weekly earnings will rise 3.5% and 4% this year and in 2020, it forecasts.

Kieran McQuinn and Conor O’Toole at the ESRI said that exports had continued to perform strongly even as fears that Britain would crash out of the EU without a Brexit transition deal had weighed on consumer and business confidence.

MPs voting to approve the transition deal could lead to a bounce in investment in the Irish economy, but there will still likely be a “pandora’s box” of issues surrounding striking an eventual UK-EU trade deal, Mr McQuinn told reporters.

The ESRI said its new analysis showed house prices and rents had diverged significantly between regions since 2011, meaning that wealthier areas were growing faster. “Areas that had relatively lower prices and rents, to begin with, appear to have experienced relatively lower rates of growth”, it said.

Mr McQuinn said the National Development Plan should stay focused on developing regions and cities outside Dublin, as a general policy response to economic divergence.

He said that there was a significant pickup in activity in cities such as the Cork area but there appears to be issues around providing public infrastructure in the region.

Noting calls for the fast-tracking of infrastructure such as the Dunkettle interchange and the M28, he said. It appears that public infrastructure was struggling to keep pace with the increase in private investment.

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