The Donohoe decade: Ireland's budget surpluses were built on a corporate tax tightrope

As Paschal Donohoe moves on to a new role in the World Bank, Ronan Smyth runs the rule over his work as Ireland's finance minister

Paschal Donohoe chairing a Eurogroup meeting in 2022. Mr Donohoe was elected president of the Eurogroup of finance ministers for three terms, making him one of the most influential voices in the eurozone. File picture: Valeria Mongelli/Bloomberg

After nearly 10 years of managing the government’s coffers, in some form or another, departing finance minister Paschal Donohoe can be credited with seeing the country through a number of difficult periods, but he leaves behind a much larger State than he inherited which is faced with some of the same problems that all the money can’t seem to solve.

First elected as a TD in February 2011, he would serve a variety of ministerial roles before landing at the Department of Public Expenditure and Reform in 2016.

Then senator and Dublin Central Dáil candidate Paschal Donohoe in 2009. It would be two more years before he won that seat, but he went on to be appointed transport, tourism, and sport minister in his first Dáil term. Picture: Sasko Lazarov/Photocall

When Leo Varadkar became taoiseach in 2017, Mr Donohoe also took over the position of finance minister from Michael Noonan.

After the 2020 general election, he continued on as finance minister until he swapped positions with Michael McGrath in late 2022 and resumed control of the Department of Public Expenditure and Reform.

Following the November election last year, he once again assumed the office of minister for finance.

This is to say that, for nearly a decade, Mr Donohoe has had at least one hand on Ireland’s public purse strings, becoming one of the most powerful voices in government as well as the longest-continuously-serving member of the current Cabinet.

During his time in government, Mr Donohoe was also elected to three terms as the president of the Eurogroup of finance ministers — making him one of the most influential fiscal voices in the eurozone.

For years, Mr Donohoe has been suggested for a number of high-ranking international finance jobs, with his name being brought up as a potential managing director of the International Monetary Fund and even as a potential successor to the current president of the European Central Bank, Christine Lagarde.

Then finance minister and Eurogroup president Paschal Donohoe welcoming European Central Bank president Christine Lagarde to Dublin in 2022. Mr Donohoe was once touted as a potential successor to Ms Lagarde as ECB chief. Picture: Julien Behal

While he has a strong image abroad, back at home he garnered a reputation for being prudent with the public finances, with Fine Gael going as far as to trot him out in the dying days of last year’s general election to emphasise the party’s measured approach to public finances in comparison to other parties.

Mr Donohoe presented his first budget as finance minister in October 2017. In 2018, the government recorded its first underlying exchequer surplus since 2006. Exchequer returns for 2018 show that €60.3bn was taken in in tax receipts, while expenditure reached €60.2bn.

This was also a year which saw corporation tax outperform — by €1.9bn — expectations to reach €10.39bn.

This would go on to become a regular feature of Mr Donohoe’s tenure, corporation taxes massively outperforming expectations.

In the following years, the Irish economy has seen strong growth, leading to increasing tax revenues and, much to Mr Donohoe’s good fortune, a surge in corporation tax. This led to higher and higher spending each year — particularly during the covid pandemic.

Fast forward to the budget delivered last month, the last one Mr Donohoe will ever present to the Dáil, which forecast Government expenditure to rise to €117.8bn next year with total current expenditure hitting €97.7bn, while capital investment expenditure reached €19.1bn.

Then finance minister Pascal Donohue at a Fine Gael Cork North Central/Cork South Central lunch at the Metropole Hotel, Cork, in April 2019. Picture: Dan Linehan

Between his first budget and his last, Mr Donohoe has overseen a near doubling of the government’s expenditure.

Government spending increases were necessary for a variety of reasons.

The covid pandemic required significant borrowing and spending by the government to prop up the economy during an emergency; the country’s infrastructure is in dire need of investment, particularly when it comes to housing; and households needed support to deal with the inflationary crisis of the last few years.

But what is also clear is that none of this would have been possible if corporation taxes hadn’t surged over the last few years.

Budget 2026 forecasts corporation tax to reach €34bn, a 226% increase compared to 2018.

Mr Donohoe would be quick to point out that the high corporation tax receipts seen in recent years cannot be relied upon to continue well into the future and, as such, the government has been running budget surpluses to put as much money into two wealth funds as possible to future-proof the public finances.

However, the last few budget cycles have been characterised by various economic bodies — including the Economic and Social Research Institute, the Central Bank of Ireland, and the Irish Fiscal Advisory Council — recommending that spending increases be limited to 5% annually, as per the government spending rule — and the government ignoring that rule.

The Eurogroup president Paschal Donohoe speaking during an informal meeting of economics and finance ministers in Berlin in 2020. Picture: Kay Nietfeld/DPA/AP

There have been warnings for years that Ireland has become very reliant on just a handful of US multinational companies for the bulk of its corporation tax receipts.

This is only set to get worse when Pillar Two tax reforms come into effect next year which will see the largest companies pay 15% corporate tax receipts instead of 12.5%.

There have also been repeated calls for the Government to broaden the tax base so that it isn’t so reliant on corporate tax rates, but very little has been done on this.

Economically, Ireland outperforms the rest of Europe and, despite international trade and geopolitical issues, the domestic economy is still expected to grow this year and next year, albeit at a slower pace.

The Central Bank forecasts that modified domestic demand (MDD) — the preferred measure of the Irish economy that strips out activity of multinationals and aviation leasing companies — to grow by 2.9% this year.

This is expected to slow to an average of 2.3% over the course of next year and 2027.

But the public finances are still in a precarious place, particularly if corporation tax receipts fall, or a particular economic sector such as tech or pharmaceuticals hits a rough patch.

Timmy Murphy and Conor McCarthy enjoying a pint at the Southside Bar, Bandon Rd, Cork as they watch then finance minister Pascal Donoghue delivering Budget 2022. Picture: Dan Linehan

Should the AI bubble in the tech sector pop, or tariffs on pharmaceuticals be enacted, the public finances could take a significant hit.

Mr Donohoe can be credited with shepherding the country’s finances through a number of difficult periods over the last few years, but he leaves behind a Government that is significantly larger, with numerous problems still to be addressed — particularly around infrastructure and housing, and an increasing reliance on US multinationals and their volatile corporate tax receipts — which still have to be carefully managed.