Sunday 15 December 2019

Brendan Keenan: Corporation tax saved us -- so hands off, Brussels

Brendan Keenan

Brendan Keenan

HANDS off our corporation tax! That should be the message to Brussels and Berlin. If they want to see why, they could look at the Exchequer returns for the first nine months of the year.

Not a pretty picture, to be sure. The cost of running the country exceeded available revenues by more than €13bn, which is close to €40m per week. But that was no worse than had been forecast at Budget time last December.

From the point of view of the Department of Finance, that counts as a result. The day was saved by what might be called a late goal from corporation tax, which is levied on company profits.

At more than €2bn, this brought in €235m more than expected at this stage of the year. That was almost enough to cover a €337m shortfall in income taxes. The €22,173m collected in taxes was a mere €42m out, which sounds like one of those moon landing calculations NASA used to boast about.

Corporation tax brought in 10pc of total revenues, so no one can say that the low 12.5pc rate damages revenues. In fact, the Europeans' dislike of the rate is because they believe some of that €2bn is rightfully their revenue.

They hope that a higher rate would deter foreign companies and financial institutions from booking profitable activities through Ireland. It is a legitimate enough complaint. But it seems extraordinary, to say the least, to have it come up again in the context of Ireland desperately trying to match revenue and expenditures.

That desperate struggle now moves into 2011, and it is not getting any easier. It was supposed to get a bit easier, with the €4bn budget correction this year replaced by an "easier" €3bn next year. The way things are looking, there may not be much difference at all.

It seems unlikely that Finance Minister Brian Lenihan will go for as much as €4bn again. But he has said quite clearly that a €3bn cut will just not be enough.

This has little or nothing to do with what happened this year. Not even the banking rescue. Although the cost of the rescue will appear on this year's official statistics -- to give a Guinness Book of Records deficit of 32pc of national output (GDP) -- the actual cash payments will be spread over several years. Some will come from the national pension fund.

The Exchequer deficit, which measures tax revenues in and government spending out, will show a deficit of just under 12pc of GDP. That is worse than forecast last December, and it is the figure that everyone uses.

So, while taxes and spending were on target, GDP was less than forecast. The percentage of GDP represented by the deficit goes up. It seems pretty technical, but the consequences are anything but technical.

Governments rely on cash, which means the effects of inflation have to be included. Not only was there no inflation this year -- prices actually fell. This left cash GDP down by 3.7pc in the first six months compared with 2009. Thank goodness they don't use national income (GNP), which dropped more than 6pc.

The fact is that real output this year, although sluggish in the extreme, has been better than the department thought. But next year looks like dashing the hopes they had for it last December.

Yesterday, the Central Bank forecast a 2.4pc increase in real output, and a 1.4pc rise in prices. So cash ("nominal") GDP might grow by almost 4pc. Not bad in itself, but the original fiscal plan forecast 5pc.

That never seemed very likely, and now it seems highly unlikely. We will have to wait until next month to see the Government's new forecast, but it would not be a surprise if it were close to the Central Bank figure. One percent of GDP is not far off €2bn, so this apparently small change means a great deal to the taxpayers and recipients of government funds.

Mr Lenihan will have to admit on Budget day that the 2010 deficit, at an expected 11.9pc of GDP, is no smaller than the 2009 deficit. He clearly does not want to tell everyone that the 2011 gap will be no smaller either.

With higher nomìnal growth, and perhaps €3.5bn or so in taxes and spending cuts, he will hope to publish a 2011 deficit figure reasonably close to the 10pc of GDP in the original plan.

Presumably, we will know this before Budget Day, when the detailed four-year programme is published next month. It will have to show a significant reduction in the deficit in 2012, so the planned €1.5bn correction that year might also be revised upwards.

Government can wrestle with taxes and spending, but it cannot decide the growth rate. The argument will continue to rage that tightening the former depresses the latter so much that it is self-defeating.

Such niceties may have to wait for a later stage. If the detailed budgetary plan improves consumer confidence a bit on the basis that people know more about what is coming, and the global economy picks up next year, it may be possible to have a general improvement in sentiment by this time next year.

A lot of maybes, but that is about all that is on offer right now.

bkeenan@independent.ie

Irish Independent

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