By most measures, things are going spectacularly well for Ireland.
Against a backdrop of stagnating European growth, it expanded 12% in 2022. More of its people are at work than ever before. Its national coffers are overflowing, with the government forecasting a cumulative surplus of €65 billion ($71 billion) by 2026. Investors are asking for less to lend to Ireland than to France, Finland, Austria and Belgium, a far cry from 2010 when it was locked out of international debt markets. Its public finances are in a “sweet spot,” says Finance Minister Michael McGrath, one that prompted Moody’s recently to upgrade the country’s long-term foreign debt rating to Aa3 from A1.
But underwriting much of that success is a surge in corporate tax receipts, which are forecast to hit €24 billion this year thanks to the country’s role as a key European base for such multinationals as Apple Inc., Microsoft Corp., and Pfizer Inc. While in the past such unsustainable gains in tax receipts might have been spent, Ireland now plans to squirrel some of them away in a fund for potentially bumpier times in the future.
On Wednesday, the country announced plans for a sovereign wealth fund into which up to €90 billion of unreliable “windfall” corporate taxes and budget surpluses will be transferred by 2030 to help pay for such eventualities as the costs related to an aging population or the dual climate and digital transitions.
“While the headline budgetary position does indeed look very good today, the underlying position is much less favorable and we know for a fact that there are major challenges on the horizon,” McGrath told reporters in Dublin.
Ireland has for years enjoyed healthy corporation tax receipts from the slew of large multinational firms based in Dublin partly to take advantage of its 12.5% headline rate. Corporate tax receipts have doubled since just before the pandemic. Of the corporate taxes Ireland could collect this year, half would come from potentially unsustainable windfall receipts, government estimates show.
At the recent Bloomberg New Economy Gateway conference near Dublin, McGrath said the government’s “biggest mistake” would be to make permanent expenditure decisions on the back of unreliable corporate tax revenues.
His caution may be warranted.
Preliminary first quarter GDP figures showed the Irish economy shrinking by 2.7% on a quarterly basis, although it was 6.4% bigger than a year earlier.
The operations of multinationals dramatically skew Irish GDP figures. According to one of the government’s preferred measures, the domestic economy slipped into recession in the latter half of 2022.
While that shows the somewhat precarious nature of Ireland’s growth, it’s concerns about volatile corporate tax receipts that make McGrath wary. For instance, without the windfall receipts, the public finances would be €1.8 billion in deficit this year rather than in surplus to the tune of €10 billion, according to government estimates.
Memories of the last financial crash and the transitory property taxes that Ireland built its economy on are still fresh too, and the government has already put €6 billion away in a reserve fund since last year.
Now, McGrath is setting up another longer-term fund akin to Norway’s sovereign wealth fund. How much will be stashed away in this fund each year has yet to be determined, but if it hits €90 billion by 2030, can earn a strong return and reinvests it out to 2035, its total value could reach €142 billion, according to a report published on Wednesday.
“To me, it is blindingly obvious that we need to do this because we are receiving an enormous amount of corporation tax receipts,” McGrath said. “It will not last indefinitely into the future.”
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