Corporation tax threatened as IMF warns of slow growth

International Monetary Fund says the world may soon be ‘on the brink’ of a new recession

IMF chief economist Pierre-Olivier Gourinchas. Photo: David Paul Morris/Bloomberg

John Ihle

July 27 2022 02:30 AM

Ireland’s buoyant corporate tax revenue is looking increasingly under threat after the International Monetary Fund (IMF) cut global growth forecasts on Tuesday for the third time this year.

The IMF warned that downside risks from high inflation and the Ukraine war were materialising and could push the world economy to the brink of recession if left unchecked.

That would have a knock-on effect on the profits of the world’s biggest companies, many of which have their European headquarter in Ireland and pay billions in taxes here.

“It appears more likely than not now that the US is going into recession,” said Dermot O’Leary, chief economist at Goodbody.

“[Corporate] earnings forecasts are still for growth but that’s unlikely given the contraction that is coming. I think that will affect the corporate tax take in the next 12 months.”

Global real GDP growth will slow to 3.2pc in 2022 from a forecast of 3.6pc issued in April, the IMF said in an update of its World Economic Outlook.

The Fund also cut its 2023 growth forecast to 2.9pc from the April estimate of 3.6pc, citing the impact of tighter monetary policy.

World growth had rebounded in 2021 to 6.1pc after the COVID-19 pandemic crushed global output in 2020 with a 3.1pc contraction.

“The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one,” IMF Chief Economist Pierre-Olivier Gourinchas said in a statement.

Several Silicon Valley companies that are major Irish employers, such as Google and Meta, have already put hiring freezes in place or cut workers in anticipation of a slowdown.

US technology and pharmaceutical companies are the biggest contributors to Irish corporation taxes, with the top 10 firms paying more than 50pc of the total.

So far corporation taxes show no signs of slowing down. According to Exchequer figures from the half-year mark, corporation taxes were up nearly 53pc at €8.8bn, putting the public finances on track for a surplus by the end of the year.

But there have been many warnings, from the Central Bank, Irish Fiscal Advisory Council and even the Department of Finance itself, that the Government should not come to rely on the durability of these windfall gains.

The IMF said its latest forecasts were “extraordinarily uncertain” and subject to downside risks from Russia’s war in Ukraine pushing energy and food prices higher. This would exacerbate inflation and embed longer-term inflationary expectations that would prompt further monetary policy tightening.

Under a “plausible” alternative scenario that includes a complete cut-off of Russian gas supplies to Europe by year-end and a further 30pc drop in Russian oil exports, the IMF said global growth would slow to 2.6pc in 2022 and 2pc in 2023, with growth virtually zero in Europe and the United States next year.

Global growth has fallen below 2pc only five times since 1970, the IMF said.

Additional reporting by Reuters