Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Ireland is expecting bumper corporation tax receipts to deliver an €8.6bn budget surplus this year, giving the government leeway in an expected pre-election budget even as it cautions that the outsized contributions from multinationals could soon wane.
In a spring economic update on Tuesday, Michael McGrath, finance minister, said Ireland’s economy was “in reasonably good shape”. Growth this year in modified domestic demand, Ireland’s preferred measure of output, is now forecast to be 1.9 per cent, compared with a forecast of 2.2 per cent last autumn, and 2.3 per cent in 2025.
The forecast surplus, which is projected to hit €10.7bn in 2027, comes after a nearly 25 per cent drop in corporation tax receipts in the first quarter this year, including a sharp decline in March that the government attributed to a timing issue.
Ireland, which is grappling with housing and infrastructure constraints despite its newfound wealth, last year posted the EU’s third-largest budget surplus as a percentage of GDP, behind Denmark and Cyprus. Ireland’s GDP, however, is distorted by global companies based in the country.
Tuesday’s data showed the expected 2024-27 surplus was now 42 per cent lower than forecast this time last year, underscoring the government’s message of caution that an era of exceptional tax contributions from those overseas companies may be fading.
Taxes paid by global tech and pharma groups with European headquarters or large operations in Ireland have been booming for a decade and doubled from 2020-22. But because their operations distort economic data, Ireland prefers to assess growth by its MDD measure, which strips out their activities.
“I would caution that this surplus is heavily dependent on volatile ‘windfall’ corporation tax receipts, which have grown from €4bn to €24bn in the space of a decade,” McGrath said in a statement. “We can say with reasonable confidence at this point that the era of corporation tax overperformance is coming to an end.”
The government believes as much as €11bn — nearly half of this year’s projected €24.5bn corporation tax haul — amounts to a “windfall” of exceptional profits paid by a small number of firms. When the windfall was stripped out, Ireland would have a 0.9 per cent deficit this year, the government said.
Despite the surplus, Ireland’s memory of its economic crisis a decade and a half ago remains raw. The government has set up two sovereign wealth funds to save exceptional income for future pension, infrastructure and climate challenges.
But despite “underlying vulnerabilities”, Dermot O’Leary, chief economist at Goodbody, saw “political incentives to use some of those gains [in the budget], especially at the end of the electoral cycle. The next budget is the most important from an electoral point of view.”
Ireland must hold a general election by March 2025 and a three-party ruling coalition, made up of the centrist Fine Gael and Fianna Fáil parties, and the Greens, is seeking to stay in power despite nationalist Sinn Féin being the most popular party in the polls.
But Kevin Timoney, chief economist at brokerage Davy, said the government would be wary of overheating the economy with generous fiscal policies “when inflation has just started to come down again”.
Tuesday’s projections do not take into account the expected size of the 2025 budget. Those forecasts come in the summer.
Read the full article here
