Government’s €6bn windfall could be wiped out, warns economist

The Government enjoyed an unexpected €6 billion windfall between 2015 and 2018 courtesy of stronger-than-expected corporation tax receipts and a lower interest rate bill on the State’s national debt.

However, Seamus Coffey, chairman of the Irish Fiscal Advisory Council (IFAC), warned the reverse could easily happen in the coming years, with higher interest rate costs and a negative shock to corporation tax creating a similar-sized hole in the public finances.

"It's inevitable there'll be a slowdown at some stage. If that is allied with an increase in interest rates and for some reason a reduction in corporation tax receipts in Ireland, we could see a large deficit opening up very rapidly," he told the Committee on Budgetary Oversight.

Mr Coffey said that in 2015 the Government had forecast corporation tax receipts for 2018 of about €5.5 billion, but revenue from the business tax is likely to hit €8.5 billion this year. Similarly, the Government expected to pay €8.5 billion in interest on the national debt in 2018, but the lower interest rate environment means this will be closer to €5.5 billion.

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“That €6 billion swing was outside of the general economic improvement we’ve seen in the economy,” Mr Coffey said, noting approximately 80 per cent of the State’s corporation tax take was paid by multinationals on the basis of profits generated elsewhere.

“We’ve seen a huge swing in our favour. Huge tailwinds even before you get near the cyclical recovery we’ve experienced,” he said.

Absorbed

Nearly all the €6 billion, he said, had been absorbed either through additional spending increases in the health area or through a ramping-up of public capital spending.

“Even with that gain we’re still expected to run a budget deficit for 2018 and that’s what leaves us in a vulnerable position,” Mr Coffey said.

In its pre-budget submission, published earlier this month, IFAC suggested an “earlier-than-planned move” to running a small budgetary surplus may be warranted given the favourable economic conditions and the potential threats hanging over the Irish economy from Brexit and changes to the international tax environment.

I'm at a loss to say why there is vacant housing given the rent increases in recent years

Having originally targeted a budget surplus in 2018, the Government is still running budget deficits (spending more than it raises in revenues) despite having one of the highest debt burdens in the OECD. It is now not expected to achieve a surplus until 2020.

Ramping-up

Mr Coffey also told the committee that the council was not against a big ramping-up of spending on housing to deal with the current crisis provided it was funded by revenue-raising measures elsewhere and did not upset the budgetary adjustments allowed under the EU’s fiscal rules.

He said he was extremely surprised by the high number of vacant houses in the State, not least with the rental income the owners could make.

“Particularly in urban and city centres, I’m at a loss to say why there is vacant housing given the rent increases in recent years,” he said.

Central Statistics Office data from 2016 suggests over 12 per cent of the current housing stock, excluding holiday homes and those for sale or rent, lie vacant.

A Government-commissioned report on the issue advocates a major programme of compulsory purchasing of vacant properties by county councils be undertaken with the assistance of the Government.