Irish government must control spending, ratings agency warns

DBRS and Finance Minister Michael McGrath highlight State’s budget and debt vulnerabilities amid tech industry job losses

Finance Minister Michael McGrath. Photo: Gareth Chaney/Collins

Sarah Collins

February 04 2023 02:30 AM

Ireland's “magic money” corporation tax receipts cannot last, a leading ratings agency has said.

Falling profits in tech and pharmaceutical companies pose the biggest risk to the tax take, according to DBRS Morningstar.

In a note published on Friday, DBRS urged “expenditure control” to guard against a future reversal in tax receipts.

“The principal concern around fiscal policy in Ireland is that large windfall revenues could reverse, precisely at a time when Ireland faces high public spending demands around housing and healthcare,” the note said.

“Irish authorities are well aware that public finances are worse than suggested by headline data and that the growth rate of corporate tax in recent years cannot last.”

The analysis comes after the Department of Finance’s annual report on public debt pointed to vulnerabilities in public finances from a shock to the multinational sector.

If Ireland’s windfall corporation taxes were to disappear – estimated at around €10bn in 2022 – that could add 10 percentage points to the debt-income ratio by 2025, the department’s report said.

A larger shock that hits energy prices, pushes up interest rates and results in a fall in global growth, could lead to a 25-point increase in the debt ratio by 2025.

“A decline in corporation tax revenue could trigger a return to public deficits, and the concomitant need to issue new debt at higher interest rates,” the report said.

Public debt increased to €226bn at the end of 2022, up from €203bn just before the pandemic.

That amounts to 86pc of national income, or around €44,000 for every person in the country.

The underlying fiscal position is not as strong as the headline figures would suggest

Finance Minister Michael McGrath said the Government has to be “conscious” of the risks it faces, despite recent Exchequer returns showing buoyant tax receipts in January.

“The underlying fiscal position is not as strong as the headline figures would suggest,” Mr McGrath said yesterday.

“The tax base is narrow and the public finances remain exposed to a shock in corporate tax receipts or the broader income tax revenues associated with these multinational enterprises.”

In January the State’s income was boosted by an extra €800m of tax paid compared to the same month last year, as well as €300m from the sale of AIB shares.

The Exchequer surplus of €2.8bn in January compares to a surplus of €2.2bn in the same month last year. January is not a big month for corporation tax, but it is for Vat, which was up €400m on the previous year thanks to Christmas spending.

DBRS said the fallout from the global tax reform led by the Organisation for Economic Cooperation and Development is a medium-term risk for Ireland.

A 15pc minimum corporate tax is set to apply from next year within the EU, with the OECD this week releasing technical specifications on how to implement it. However, the US has yet to adopt it.

DBRS said Ireland has “significant advantages that even in the context of a global minimum corporate tax rate will continue to keep its economy competitive”.