Budget 2019: portion of corporation tax to go into ‘rainy day fund’

Some of the high levels of corporation tax paid by multinationals will be set aside and put into the State’s so-called “rainy day fund”, the Government will announce this week.

Minister for Finance Paschal Donohoe will use the summer economic statement on Tuesday to flag the policy change, which will be intended to go some way to decreasing reliance on corporation tax receipts.

It is not expected that Mr Donohoe will, at this stage, say how much he wants set aside for the fund. The "rainy day fund" has already been agreed with Fianna Fáil, with an initial €500 million to be allocated for it in the October budget.

Rather, the summer statement will flag an intention to absorb what is described by sources as “excess” corporation tax.

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The Government has been repeatedly warned not to develop an over-reliance on corporation tax.

The latest set of exchequer returns for May showed corporation tax generated just over €2 billion so far this year, which was €247 million or 13.5 per cent ahead of target. It is expected that Mr Donohoe will flag that he intends to put some of these high levels of corporation tax into the fund.

Diverted

Fianna Fáil proposed such a move ahead of the last general election, which means it would be likely to support the announcement from Mr Donohoe. At the time, Fianna Fáil’s finance spokesman Michael McGrath said the excess corporation tax raised above projections by the Revenue Commissioners should be diverted into the fund rather than used for day-to-day spending.

The confidence and supply agreement between Fianna Fáil and Fine Gael means Micheál Martin's party's acquiescence is needed to pass budgetary policy.

Mr Donohoe's intention is to transfer an initial tranche of €1.5 billion from the State's sovereign wealth fund, the Ireland Strategic Investment Funds, and add €500 million a year for the next three years. This will see the fund reach €3 billion by the end of 2021, with the first €500 million allocated in the next Budget.

The Minister has also said the aspiration is to get the fund up to €8 billion over the medium term, and has admitted this would be likely to require a bigger annual contribution than the €500 million currently envisaged if it was to be achieved in the medium term.

When announcing the summer economic statement, Mr Donohoe is also expected to outline the level of resources available for the October budget and to re-iterate that he wants to hold some of that money back.

Requests

It is anticipated that Mr Donohoe will say that his objective is for a broadly balanced budget. The Dublin Central TD is also expected to argue that the Government will not be able to meet all of the demands that will be placed on it, in terms of requests for extra public spending.

Mr McGrath has said he agrees with the “overall principle” of not spending all the money that may be available.

However, decisions on how much should be spent are a “judgment” for when complete budgetary figures are available, he said.

Mr Donohoe’s budgetary policy, it is argued by one Government figure, will be to reduce borrowing and “support sustainable improvements in living standards”. In the time ahead, the Minister is also expected to outline how different levels of public spending will affect the budget deficit, as well as potentially overheating the economy.

Instead of focusing on the so-called “fiscal space” – the exact amount of resources available – Mr Donohoe will instead determine the shape of the budget by what he calls the appropriate “budgetary stance”.

This is basically the amount of money he judges is wise to spend next year.