High debt and tax changes pose financial risk to Ireland, commission warns

High debt levels combined with potential changes in corporation tax pose a financial risk to Ireland, the European Commission has warned.

As part of its European semester spring package, Brussels pinpointed several member states, including Ireland, which were exhibiting "macroeconomic imbalances".

The vulnerabilities in Ireland related to large private and government debts, it said.

“Government debt remains high according to various metrics, with downside risks relating to possible changes in corporate taxation rules and reforms in international taxation,” it said.

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Multinational companies

The Government has factored in a €2 billion decline in corporation tax receipts by 2025 from the proposed changes to the global system being drawn up by the Organisation for Economic Co-operation and Development (OECD).

However, the Irish Fiscal Advisory Council warned last week the decline would be much larger.

In its report, the commission noted that corporate debt – a sizeable component of private debt – was inflated by the presence of multinational companies here, most of which have “very few linkages to the domestic economy”.

It also warned that household debt as a share of household gross disposable income remains among the highest in the EU.

More generally, the commission on Wednesday proposed keeping the EU’s deficit rules on hold through 2022 but urged governments to manage their public finances carefully.

Covid spending

Member states will likely approve the commission’s proposals, which have facilitated a massive uptick in spending on Covid-related supports.

The deficit rules were suspended last year shortly after the pandemic took hold.

However, the commission is now urging EU member states to keep spending in check and consider the prudent and sustainable fiscal policy they should pursue from 2023 on.

"As our economies emerge from this crisis, we will be faced with significantly higher debt levels," economy commissioner Paolo Gentiloni said during a press conference to unveil the semester package.