US tariffs could, in an extreme scenario, punch an €18 billion hole in the public finances, the Central Bank of Ireland has warned.
In a special article published alongside its latest quarterly bulletin, the regulator models the threat to the Republic’s tax base from a big change in US trade policy.
In the worst-case scenario, involving weaker corporation tax receipts and a slowdown in multinational investment, it predicted the State could end up with a budget deficit of 4 per cent, equivalent to €17.7 billion, by the end of the decade.
Last year, the State ran a budget surplus, excluding the Apple tax money, of €8.9 billion.
In its report, the central bank noted that strong economic growth and “exceptional” corporation tax receipts had benefited the public finances over the last decade.
However, it warned that “these benign conditions” were now under threat from US tariffs and the shake-up in global trade.
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The bank sets out three possible scenarios for how tariffs might affect the economy.
In its baseline scenario, which involves 20 per cent tariffs on EU goods going into the US with pharmaceuticals and semiconductors exempt, the Republic runs a budget surplus of 2 per cent in 2030.
In a more adverse scenario with pharmaceuticals and semiconductors getting hit by 20 per cent tariffs and with the EU retaliating with 20 per cent tariffs of its own, this surplus shrinks to less than 1 per cent in 2030.
In an even more extreme scenario, involving the State losing the windfall element of its corporate tax base and lower levels of new multinational investment, the surplus flips to a 4 per cent deficit.
While the latter scenario painted a bleak outlook for the economy, central bank director of economics and statistics Robert Kelly noted that it did not envisage the possibility of a big multinational leaving the jurisdiction because of tariffs or changes to US tax law which, he said, could pose an even greater risk to the public finances here.
The central bank said the imposition of the US tariffs was likely to hit the State in two ways through the “trade channel” in terms of fewer exports to the US and through foreign direct investment.
“Tariffs could act as a disincentive for US firms to locate production in Ireland, leading to a reduced inflow of multinational investment,” it said.
“Additional changes made to the US tax code or industrial policy could lead to a reversal of the strong IP [intellectual property] inflows to Ireland that have occurred in recent years that have underpinned the growth in windfall corporation tax revenue,” it said.
To improve long-term growth and the resilience of the economy, the central bank said increases in public investment to address infrastructure gaps were needed.
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However, “with current full-employment conditions and in the absence of offsetting revenue-raising measures, large increases in public investment on top of existing plans could cause overheating pressures”, it warned.
In its latest assessment, the central bank cut its headline growth forecasts for the economy, citing the “heightened uncertainty” around US trade policy, which it said was weighing on investment and consumption.
It predicted the economy would grow by 2 per cent in modified domestic demand terms this year and by 2.1 per cent on average in 2026 and 2027, which represented a 0.5 per cent cut on previous forecasts.
However, it warned the outlook was sensitive to the threat of “escalating geoeconomic fragmentation”.
In the case where trading conditions deteriorate, Irish economic growth would slow to about 1 per cent per annum.
