Last Friday, Minister for Finance Paschal Donohoe delivered a well-crafted speech about Ireland’s economic prospects and the policy framework around next October’s budget.

He was addressing a conference at the Economic and Social Research Institute and warned about clouds on the economic horizon. His main worries were:

  • The sharp recent burst of inflation.
  • The geopolitical situation.
  • Rising interest rates.
  • Excessive reliance on revenue from corporation tax.

    • The inflation surge predates the war in Ukraine but the conflict exacerbates the supply deficiency in energy markets which emerged as COVID-19 restrictions were relaxed.

    Inflation around the Eurozone is now 8%, versus an official target of 2%, and the European Central Bank (ECB) has started to tighten monetary policy.

    Short-term interest rates will be increased and the ECB will withdraw from buying Government bonds. That means extra Government spending on debt service and closer scrutiny from bond investors.

    The budget deficits of recent years would have been larger had it not been for an unexpected boom in receipts from corporation tax, which now account for 20% of total receipts. This is reminiscent of the late bubble period, the years leading up to the crash of 2008, when weak expenditure control and tax cuts were offset by a boom in stamp duty revenue which did not last.

    The budget numbers flattered to deceive. It is highly unusual for corporation tax to contribute so much revenue – 10% of total revenue would be regarded as a high score internationally.

    Donohoe’s speech reads like it was aimed at the Cabinet and his colleagues do not seem keen to read the memo

    When stamp duty revenue collapsed in 2009 after the bubble burst, the deficit soared and the country ended up in an IMF programme in the autumn of 2010.

    Nobody would buy Irish Government bonds and two other eurozone countries, Greece and Portugal, ended up in the same boat.

    Corporate tax revenues

    If corporation tax revenues decline, perhaps because the US Treasury acts to stem the haemorrhage of receipts which would more properly accrue in the US, the impact here would be comparable to the evaporating stamp duties last time round.

    Donohoe is wise to recall that episode and to spot the parallel on the tax side.

    He did not allude to the weakening of expenditure control in recent years, an equally striking parallel.

    Donohoe’s speech reads like it was aimed at the Cabinet and his colleagues do not seem keen to read the memo.

    His Fine Gael party leader, Leo Varadkar, due to assume the Taoiseach’s office soon after the budget, has been talking about tax reductions and the airwaves are replete with daily demands for extra public spending under all heads.