Corporation tax windfalls should not be used to fund infrastructure boost – IFAC

By Gráinne Ní Aodha, Press Association

Corporation taxes should not be used to fund infrastructure spending, Ireland’s budgetary watchdog has said.

It said the gaps in infrastructure across Ireland should be funded through revenue-raising measures elsewhere in the economy and said that more and more of “volatile” corporation tax windfalls were being spent on current expenditure.

The committee heard that the proportion of corporation tax receipts spent by the Government had risen from 60 per cent to almost 90 per cent.

The Government has said that its plan to invest €275.4 billion in infrastructure over the next 10 years will be funded by the Apple tax windfall of €14 billion, proceeds from the selling of state shares in AIB, and the Infrastructure, Climate and Nature Fund.

This aims to fix a deficit in public infrastructure, particularly in the energy and water sectors, which is hampering housing delivery amid a housing and homelessness crisis in Ireland.

The Irish Fiscal Advisory Council (IFAC) has previously warned that the Government is “budgeting like there’s no tomorrow” and repeatedly said plans need to be put in place for an ageing population and climate change adaptations.

Chairperson of IFAC Seamus Coffey said spending last year was 3.9 billion above what was budgeted for and said it was unlikely that the European Commission would take action if Ireland breached its spending limits.

He was speaking before the Oireachtas finance committee with colleagues Professor Karina Doorley, a member of IFAC and an associate research professor, and Niall Conroy, acting chief economist and head of secretariat of IFAC.

Mr Coffey said it was not the case that just because Ireland has a fast growing population and economy that Ireland should have the highest expenditure level in the EU.

“Typically, we might hope that fiscal policy will be counter-cyclical, that when your economy is performing well and doesn’t necessarily need additional fiscal support, that some resources will be kept aside for use when they are required if the economy was to be performing poorer.”

Mr Coffey said the over-runs in health were “pretty modest” but there was “poor budgeting” in the Department of Education, which overran its budget by €500-600 million last year.

He said that while the Irish economy could sustain a growth rate of 5 per cent, if it were to go above that it could not sustain it over a long period of time.

Social Democrat TD Cian O’Callaghan asked how the Government could run high-cost public services, stick to the 5 per cent spending limit as suggested, and also address the country’s infrastructure deficit.

“We would agree that, obviously there is this infrastructure deficit that has to be addressed, and that’s going to take some spending,” Prof Doorley said.

“But I suppose the point is, if Government identifies that we need to increase spending in a particular area, let’s say it’s infrastructure, then revenue has to be raised elsewhere.

“So you mentioned the public sector, that costs a lot of money to run, if revenue has to be raised elsewhere, there are options out there.

“So the Commission on Taxation and Welfare had recommended broadening the tax base, a number of revenue raising measures that are actually referenced in the medium-term plan.”

Mr O’Callaghan suggested that this meant infrastructure spending should not be fuelled by “non-funded” spending over a prolonged period of time, to which Prof Doorley said: “Exactly.”

She added: “If you want to inject a lot of money into the economy and do so sustainably, you have to take money out elsewhere, basically.”

Mr Coffey said that when the Government collects corporation tax and then spends it, “it’s like an injection, a boost into the economy”.

“We’re not in a position where the economy needs that type of fiscal support.”

He added: “We do feel that at present, even we with these bumper corporation tax receipts coming in, we are seeing declining surpluses.

“So for 2025, we’re likely to see a surplus of around 10 billion. For 2026, the plan is to run a surplus of five billion. So more and more of these corporation tax receipts are being spent.

“We’ve gone from a number of years ago spending in the region of 60% of it, we’re now heading for close to 90% of those receipts being spent and baked into ongoing spending commitments.”

Earlier, Tánaiste and Finance Minister Simon Harris said that IFAC’s advice to rein in spending was welcome.

“In fairness, you wouldn’t get that perspective in Dáil Éireann and every time you go into Dail Eireann, ‘spend more, spend more, spend more’ is the cries from the opposition benches, so it’s good to have external expertise.”

He said that Mr Coffey had advised him that the most important thing the Government needed to do in terms of its medium term fiscal framework was “pick a figure and stick to it”.

He said he and Public Expenditure Minister Jack Chambers had “worked to identify a figure of spending that we believe is realistic, and that’s exactly what we now intend to deliver”.