Monday 14 October 2019

Soaring corporation tax receipts set to offset potential hard Brexit

Budget architect: Finance Minister Paschal Donohoe working on Budget 2020
Photo: Gerry Mooney
Budget architect: Finance Minister Paschal Donohoe working on Budget 2020 Photo: Gerry Mooney

David Chance

Surging corporation tax receipts look set to deliver the financial firepower to offset a hard Brexit as Minister for Finance Paschal Donohoe readies his 2020 budget, according to new data.

The latest Exchequer returns from the Department of Finance showed that tax receipts through to September were €674m ahead of expectations at €40.78bn and that the government was running a small budget surplus of €38m for the year so far versus a deficit of more than €1.4bn last year.

“The €1.5bn year-on-year improvement is driven by increases across all revenue streams; tax, non-tax and capital receipts, and somewhat offset by increases in both current and capital voted expenditure,” the Department said in a statement.

Corporation taxes, which are mostly paid by the large American multinationals that have made their home in Ireland, delivered almost €700m more than they did at this stage last year, totalling €5.84bn.

The government had cut its forecast for corporation tax receipts for this year after it pulled in a record €10.4bn in 2018 and it expected that number to fall to €9.98bn, a target that now looks likely to be exceeded.

Minister Donohoe has said he will set a “Brexit” budget in anticipation that Britain will fall out of the European Union without a deal, an event that could put the brakes on economic growth here and even send the economy into a recession.

The Economic and Social Research Institute warned that the government may need a supplementary budget in the New Year if the hit from Brexit is harder than expected.

If a hard Brexit is avoided, ESRI expects the government to run a budget surplus equivalent to 0.4pc of gross domestic product, but in the case of a hard Brexit, the deficit could be as much as 1.5pc of GDP.

Given the surplus run last year and the accumulation of a “rainy day fund” as well as Mr Donohoe’s decision not to embark on tax cuts, Ireland’s finances are capable of sustaining a hit of this magnitude, according to both ESRI and the Central Bank of Ireland which has endorsed extra spending in the case of a Brexit shock.

In 2018, the government recorded its first budget surplus since before the crash which laid waste to Ireland’s finances as the State bailed out failing banks with tens of billions of taxpayers’ money and it is now on track for a second successive year in which it will spend less than it receives in taxes.

The saviour for state finances have been payments from the likes of Facebook and Google who are headquartered here and who contribute almost eight in every ten euros the government receives in company taxes.

Corporation taxes have almost doubled since 2012 and now account for over 18pc of total tax revenues, up from the 10.8pc average from 1984-2016 and have overtaken excise duties to become the third most important revenue stream for the exchequer.

That surge in revenue has allowed the government to fund massive overspending on health to the tune of €500m a year in recent times, according to the Irish Fiscal Advisory Council.

While the latest rise in tax receipts mean that the government will not have to cut back on capital and other spending if the economy does go into reverse as a result of any Brexit shock, it also shows how dependent the State is on a single revenue source.

Changes to the international tax environment look set to reduce the appeal of Ireland as a base for large companies and could hit government revenues.

Online Editors

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