Ibec’s Alternative To Budget Groupthink
The business lobby group insists that government should invest in Ireland’s infrastructure and services to maintain long-term competitiveness, writes
State coffers are overflowing with tax revenues and the Department of Finance and minister Michael McGrath don’t want to spend the money.
The minister and his civil servants have decided that the revenue from corporation tax is so high that some of it must be deemed ‘surplus’. Rather than spend the money on improving the capacity of Ireland’s economy, they are intent on parking this ‘windfall’ in a new sovereign fund that will go towards public spending in later years.
As articulated by John McCarthy, chief economist at the Department of Finance, the main rationale is that a key lesson of the sovereign debt crisis a decade and a half ago is that budgetary policy must be calibrated on permanent rather than transitory revenues. “Put simply, a key policy objective must be to avoid building up permanent fiscal commitments on the basis of revenues that are potentially transitory,” McCarthy told a recent policy conference.
DoF currently estimates there will be a cumulative surplus of €65bn of tax receipts over public spending in the four-year period 2023-2026. The surpluses largely reflect the revenue stream generated by increases in profitability of corporates that pay Irish taxes. There has been a five-fold increase in corporate tax receipts in a decade, and a doubling of these receipts since just before the pandemic.
According to McCarthy, the increase in business tax revenue has gone hand-in-hand with an increase in concentration, with ten corporates accounting for €1-in-7 of all tax
collected. As the civil servants see it, concentration risk is not limited to corporate tax. Because the income tax system is weighted towards taxing high earners the most, 80% per cent of all income tax is paid by just 20% of employees.
This is not a new development, but McCarthy and his colleagues have now decided “the correlation between those sectors which generate significant levels of corporation tax and also high levels of income and other payroll taxes further highlights potential risk to the public finances”.
The perils to Ireland Inc from buoyant tax revenues were also highlighted recently by Sebastian Barnes, the English economist who recently stepped down as chairman of the Irish Fiscal Advisory Council (IFAC). According to IFAC, exceptional inflows of corporation tax receipts from foreign multinationals are currently boosting the public finances, but are “unreliable”, as just three corporate groups accounted for 30% of receipts from 2017 to 2021.
“There is a risk this could reverse due to firm-specific factors or changes in the international tax environment,” IFAC
warned recently. “Moreover, when these receipts are spent, they inject money into the economy and add to demand as they are based on overseas profits rather than domestic activity.”
Barnes added: “The government should follow the National Spending Rule to keep the economy and the public finances on track and to avoid repeating past mistakes. Choices will need to be made between new tax and spending measures and existing spending as standstill costs of maintaining existing policies and investment plans fully use fiscal space under the rule. The proposed new LongTerm Savings Fund could play a key role in saving corporation tax windfalls and supporting the sustainability of the pension system in the future.”
The self-inflicted ‘spending rule’, redolent of Gordon Browne’s short-lived golden rule, calls for increase in public spending to be limited to 5% year to year. As Barnes points out, 5% more spending across government in 2024 would barely pay for salary hikes and capital spending commitments.
In their Summer Economic Statement, ministers Michael McGrath and Paschal Donohoe indicated that growth in government ‘core spending’ will be 6.2% in 2024. They have also signalled a €250m raid on their own made-up pot of windfall corporation tax receipts for spending on infrastructure projects. For context, that €0.25bn represent 0.27% of the €91.2bn core spending budget expected for 2024. Meanwhile, the ‘windfall’ and ‘surplus’ tax receipts will keep piling up, with a general government surplus of €11.7bn predicted for 2024.
Divergence from Official Ireland’s ‘spending is dangerous’ line is hard to find, but business lobby group Ibec is challenging the groupthink. Ibec chief executive Danny McCoy, and chief economist Gerard Brady, are occasional mavericks when it comes to Official Ireland’s economic orthodoxy. They believe excessive pessimism about state capacity cannot be allowed to contribute to a failure to adequately plan for demand.
In the Ibec view, the state “has no other option” but to be biased towards action when it comes to the major
investment needs. Gerard Brady estimates that the current National Development Plan (NDP) would need to be expanded by at least €20bn between now and 2030 just to meet its initial ambitions in real terms.
According to Brady: “We know that there are certain risks of overheating in the economy. However, failing to invest ambitiously in the short run, to avoid the risk of overheating, will reduce the capacity of the economy to grow in the future. In an open economy, this is a recipe for long-term competitiveness losses and a permanent capacity deficit. Ireland will need decades of consistent investment, regardless of the economic cycle, to meet its infrastructure needs.”
In McCoy’s analysis, Irish economic policy over the past decade has been marked by a failure to plan for abundance. “Whilst private sector growth has added over 700,000 jobs to the economy, we have failed to put in place the infrastructure, services and capacity to facilitate high living standards on an ongoing basis,” says McCoy. “A failure to observe and appreciate the scale of growth in our population, in business investment and consequent demands on social infrastructure and services has left systems unable to cope. Many of our major economic and social challenges stem from this common root. They are now a material threat to social cohesion.”
In the Ibec budget submission, ‘Harnessing Abundance’, the organisation contends that despite growing affluence at a macro level, there is a keen sense that Irish society is not feeling the benefits of greater material wealth. “There are obvious reasons for this,” Brady notes. “Access to cash and a growing economy has not translated to equal access to either physical assets or services, which many regard as the mark of an affluent society. Indeed, a failure to plan for affluence by building capacity has left the economy in danger of running into limiting capacity constraints.”
Failure to invest in skills, housing, productivity and infrastructure has led to congestion in both access to physical assets like housing and to the ability of households to access services. This congestion, Ibec argues, has led to productivity being capitalised in rising asset prices rather than broad-based growth in quality of life, leading to a growing sense of a generational gap.
McCoy observes: “Housing, quality public services and reasonable public infrastructure are all out of reach for too many people. These stories are wellworn in our national discourse. They stem from a common root; investment in the private sector is outgrowing
‘Access to cash and a growing economy has not translated to access to either physical assets or services’