Tuesday 17 September 2019

'Volatile' taxes and over-spending a risk to economy, warns watchdog

Cost overrun: The site of the new National Children’s Hospital Photo: Collins
Cost overrun: The site of the new National Children’s Hospital Photo: Collins
Hugh O'Connell

Hugh O'Connell

The State's reliance on "volatile and unexpected" windfall corporation tax revenues and "weak" management of spending on major projects pose a significant risk to the economy, a report has warned.

However, the Parliamentary Budget Office (PBO) has pinpointed the threat of a no-deal Brexit as the most pressing danger facing Ireland's economy.

The State's collection of more than €10bn in windfall corporation tax receipts last year is "masking an otherwise weak Exchequer balance", according to the report from the PBO.

"The lack of a fiscal buffer and high level of government debt risk over-exposing the public finances to external shocks," the report explained.

In its latest quarterly economic and fiscal commentary, the PBO said that given the international risks facing the Irish economy "the public finances should be in stronger condition".

It also offers a scathing assessment of the Government's management of large spending projects, including the spiralling costs of the new National Children's Hospital and the National Broadband Plan.

The hospital costs are expected to top €2bn and the National Broadband Plan could cost the State €3bn.

"Weak budget constraints and inaccurate forecasts are also facilitating substantial cost overruns on major capital projects, and represent a key risk to the public finances, particularly in relation to the National Broadband Plan and the National Children's Hospital," the report states.

The report, seen by the Irish Independent, cites changes to international tax rules, overheating pressures and a global downturn as also posing significant risks to the economy over the medium term.

It warns the expected slowdown in global growth will pose a real threat to the public finances given that 77pc of the State's corporation tax receipts come from foreign-owned multinationals and half of all these receipts come from just the top 10 taxpayers.

"The use of volatile and unexpected corporation tax receipts to fund recurring expenditure is a concern," the report said.

While day-to-day spending habits have remained stable in the first half of this year, the PBO said there were indications the uncertainty over Brexit was having an impact on larger purchases.

It highlighted issues with car sales, which were down 1.2pc in the first four months of the year, and suggested the threat of a no-deal Brexit could be responsible for the slowdown in house prices. The report said: "The probability of a 'no-deal' Brexit in October has increased significantly in recent weeks and is now the most pressing risk facing the Irish economy.

"The ESRI forecasts that growth would be reduced in a disorderly no-deal scenario by 0.8pc in 2020. While growth will remain positive, the losses will be heavily concentrated in certain sectors and regions."

The report pointed to persistent expenditure overruns, particularly in the health budget, as having contributed to the "deterioration in the general government balance".

It noted that spending in education had gone nearly €40m over-budget so far this year, while health spending was €20m over budget in the six months to the end of June.

The PBO said foreign firms were continuing to outperform domestic firms in productivity and wages, and highlighted issues in the Irish labour market, including participation being "below the pre-crisis peak, and particularly low for women and the low-skilled".

The PBO was set up to provide TDs, senators and the Government with impartial advice on budgetary policy following recommendations from a number of inquiries into the collapse of the banks over a decade ago.

Irish Independent

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