Friday 20 September 2019

Richard Curran: 'State can't stay lucky forever with €7bn in tax windfalls'

Lucky duo: Michael Noonan and Paschal Donohoe got lucky in relation to a number of factors that relate to the economic health of the country
Lucky duo: Michael Noonan and Paschal Donohoe got lucky in relation to a number of factors that relate to the economic health of the country
Richard Curran

Richard Curran

Naturally we are all very nervous in Ireland about our economic fortunes. Having come through an enormous financial and economic crash, everyone is on high alert that the same mistakes could be made again.

Everyone that is, except the Government. As the Central Bank pointed out this week the Irish Exchequer has benefited from a €7bn windfall since 2015. This is a very significant amount of money which works out at around €1.7bn a year.

Throw in the €560m over the last two years in AIB dividends too.

A windfall is really a chunk of money that you didn't think you were going to get. Therefore, you didn't plan for it in advance. But you have the option of spending it or saving it.

As our economic fortunes really began to improve from about 2014 onwards, the Government was faced with a number of very real post-crash problems. These included the public sector recruitment freeze, the lack of investment in infrastructure since 2007 and the clamour from the public for tax cuts and from public servants for pay rises.

The windfall came in very handy. It was made up of unplanned corporation tax receipts and reductions in the interest bill on our national debt.

Clearly, it has not all been frittered away recklessly, because the State managed to report a budget surplus last year for the first time since 2007.

But has it been best managed? Well that all depends on how long our luck holds out. And it is about luck. Yes, our level of corporation tax receipts has depended on policy issues and how the Government has responded to the international crackdown on tax avoidance.

Yet, the level of corporation tax received ultimately depends on the performance of the international global economy. Our corporation tax receipts have doubled in just four years.

They have driven 40pc of the total tax revenue growth over the four years from 2015 to 2018.

To put it in perspective, corporation tax receipts now account for 19pc of all the tax revenue the State collects, up from 11pc five years earlier. Yet just 10 companies pay about 40pc of that total corporation tax haul.

So, just 10 multinationals contribute nearly 8pc of all the tax collected in the country. The budget surplus recorded last year relied on another record bumper year from international corporations.

Even if a downturn would not precipitate a massive exodus of multinationals, surely it would take much of the froth off those figures and blow a large hole in our Exchequer finances.

The other great windfall has come from lower interest payments on the national debt. This again, has something to do with the dexterity with which the NTMA manages out debt but, in the main, it is purely a feature of the international bond market.

We got lucky on sovereign debt. We got lucky on interest rates remaining low. We got lucky on quantitative easing. We got lucky on oil prices falling in 2014 the way they did.

It seems Michael Noonan and Paschal Donohoe would have been well favoured by Napoleon, who desired "lucky generals".

As the Irish economy grew at the fastest rate in the eurozone for several years, we were told that our national debt-to-GDP ratio was falling steadily. This is true. The GDP figure kept getting bigger. So too did the amount of the national debt. In 2015 the general government debt was €201bn. In 2018 it was €214bn. Luckily as bonds matured and had to be refinanced they could be replaced at lower interest rates.

This year and next will be big years for our national debt refinancing as around €34bn of debt comes up for renewal. If all continues to go well, it will provide an opportunity to replace a large chunk of national debt with cheaper bonds.

After next year, the next really big year for refinancing national debt won't be until 2030.

But the Central Bank has chosen its words carefully in referring to what is an effective windfall in the last few years. It raises the question of what our finances might have looked like, it these lucky lump sums had not come along?

If the Government had stuck to the original financial plan and bagged the benefits of the windfalls for a rainy day, would things have been better?

Yes the Exchequer's finances would be better insulated for when the luck runs out. But what would our health service look like? What would our education sector be like? What about Garda numbers?

The mood in the country has been such that if large chunks of extra money had not been spent on hiring gardai, improving the health spend or creating new school places, many things would be a lot worse.

We may have had a lot more industrial disputes and instability than we have had in our recent years of recovery.

The core of the problem is that we will never know. The Central Bank letter which highlights the dependence on the windfalls does not necessarily provide an assessment of how the money was spent.

For example, over a two-year period, health spending has risen by €2bn to €17bn. Where has that gone? Are we happy with our health service? Have problems been fixed? The answer is no.

And looking to the future, if the health service is still broken, how will it be fixed when the Government has estimated that health spending will rise by only another €400m by 2021.

Nobody believes this, least of all those working in the sector.

An inefficient system badly in need of reform will need a lot more money in the years ahead just at a time when our windfalls may well dry up.

Going back to the good old days of the boom, which of course turned out to be the bad old days when it all went wrong, former Finance Minister Charlie McCreevy was increasing current expenditure by close to 10pc per year. We are nowhere near that. But our national debt is four times bigger than it was in Charlie McCreevy's time.

In the budget for 2019 the Government has said it will hike spending by €4.5bn. But it was criticised by the Irish Fiscal Advisory Council because this was well beyond the €3.5bn it had said would be appropriate just a few months before last October's budget.

Mr Donohoe can point to the fact that government spending will rise by just 4pc in 2019. However, the council pointed out that is from a different starting point than the Government had previously signalled. Taking the original earlier starting point the increase is closer to 6.5pc, because of last minute €1.1bn spend in 2018.

Ireland is looking for new friends in the EU now it is assumed the UK will be leaving. Our ministers and diplomats have been hanging around a bit with a North European informal league of countries, loosely referred to as the Hanseatic League (2.0) which includes Scandinavian countries and the Netherlands and a few others.

They are generally referred to as "fiscally conservative". Our budget surplus of last year bought us some credibility in that club. Did we get in the door because we effectively won the Lotto? And you cannot win the Lotto every year.

With an election likely in the next 12 months, and no immediate sign of our luck running out on debt interest payments or Corporation Tax, we are unlikely to see any big change of tack.

Indo Business

Also in Business