The European Commission and the ECB have slapped the Government’s wrists over its spending of corporate tax windfalls and urged it to resist calls to spend more as part of any “recovery dividend”.
In its so-called post-programme report on Ireland, the seventh since the country emerged from the EU-IMF-ECB troika bailout, the staff from the Commission and the ECB said the Government should have paid down debt instead of spending the proceeds of an unexpected bounty in corporate tax revenues in 2015 and 2016.
The report also warned that though the financial health of banks has improved they still have elevated levels of long-term non-performing mortgage loans. The Government received huge windfalls from corporate tax revenues in the past two years, which helped it boost the size of its last two budgets. The largesse was funded by multinationals moving significant amounts of intellectual property rights and contract manufacturing into Ireland as part of their rearranging their global tax affairs, say analysts.
In the latest report, the EU and ECB said though the prospects for the economy were “bright” that the activities of the multinationals distort the headline growth figures at a time of “uncertainty” about the outcome of the Brexit talks and the future shape of international tax and trade policies.
The report said that the Government must be prudent with its finances “to ensure” it will comply this year with the EU spending rules. “High external uncertainty puts an even greater premium on prudent fiscal policy amid calls for a recovery dividend,” said the report. “In the future, it would be prudent to use such [corporate tax] funds to accelerate deficit and debt reduction, in particular as many indicators suggest the economy is already operating close to its potential,” said the report. Calling again for a wider tax base, it wants the Government to provide more details about its proposed rainy day fund.
And the rise in residential property prices should be monitored. “The Government has repeatedly and actively intervened in the residential property market but it will still take time to deliver an adequate supply of new homes,” it said.
On Irish banks, the Commission and ECB said that though credit conditions have improved the lenders still face legacy issues from the financial crash.
“Irish banks are still vulnerable to market distress in the euro area, or possible spillovers from the UK following its decision to leave the EU,” the report said.
The report made no mention of Government proposals to sell 25% stake in AIB in the coming weeks, should market conditions allow.
General secretary of the Financial Services Union Larry Broderick said he is writing to Finance Minister Michael Noonan to say the Government should be in no rush to sell AIB. It comes after a Labour motion was passed in the Dáil on Thursday calling for the AIB shares sale to be delayed.
“A flotation of part of the State’s shareholding can take place at any stage over the coming 12 months. There is no requirement for an immediate decision to proceed with the sale,” Mr Broderick said.
Amid the housing crisis, Irish Congress of Trade Unions general secretary Patricia King said using the proceeds of the AIB sale to pay off the national debt was “unacceptable”.
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