The Government has got a reality check ahead of the October budget. Corporation tax receipts in August were down on last year and below expectations. And today the Fiscal Advisory Council (IFAC), the budget watchdog, has warned that plans for the budget need to be redrawn to keep greater control on spending.
Despite the warnings, the Government is unlikely to change its plans for a €6.4 billion budget package of permanent measures. This was outlined in the Summer Economic Statement, involving a €1.1 billion tax package, with the rest going on spending increases.
IFAC objects to the plans to breach a previous rule limiting permanent spending increases to 5 per cent. Given the strong expected budget surplus , the planned increases do not appear excessive for 2024. But the watchdog is correct to send a warning shot in relation to future years. And its concerns about higher spending fuelling inflation need to be taken into account when framing the once-off budget-day measures which are likely to form a substantial part of the package.
IFAC points out that with energy prices falling and inflation on the wane, there is a much weaker case for once-off supports for 2024. Politically, some are still likely to be announced and there are less well-off households needing support. But calls for a string of new energy credits for all households risk giving money to people who do not need it.
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IFAC’s warnings of repeating the mistakes of the past have been framed by the latest exchequer returns, showing a sharp drop in corporate tax receipts in August. Caution is needed in interpreting one month’s figures and overall corporation tax this year is still on track to come in ahead of 2022. However, what the figures do underline is Ireland’s reliance on big tax payments from a very small number of companies. IFAC has estimated that one third of all corporation tax is paid by just three firms. In turn, this leaves Ireland vulnerable to the fortunes and tax strategies of a few major tech and pharma companies,
With overall tax growth slowing, the public finances may be approaching a turning point where policymakers face sharper decisions. The IFAC reports points out that significantly higher costs lie ahead from the ageing population and funding the climate transition. These will require higher revenues, if not immediately then soon enough. And if the strong growth we have seen in tax revenues in general and corporation tax in particular eases back, then some of these choices will have to be faced sooner rather than later.
Against this uncertain backdrop, caution is needed in framing Budget 2024. There needs to be a reassessment of the political debate, much of which seems to assume that limitless resources are available and will continue to be indefinitely.