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Using 'volatile' corporate tax receipts to plug spending overruns may be unsustainable, watchdog warns

As much as €6 billion in corporate tax receipts is “excess” and unexplained, the Irish Fiscal Advisory Council has said.

ALMOST ONE IN every five euro collected by the government in tax comes from corporation tax and the reliance on using corporate tax receipts to plug spending overruns is putting the public finances at risk, the Irish Fiscal Advisory Council (IFAC) has warned

In its latest Fiscal Assessment Report, IFAC said that strong growth in the domestic economy has continued which risks overheating in the near term. 

Up to €6 billion of corporate tax take is referred to as “excess”, meaning that it cannot be counted on in the future.

Speaking to RTÉ’s Morning Ireland, IFAC chairperson Seamus Coffey said: “The issue is a large part of it is unexplained, and in our view between €2 billion and €6 billion could be considered as in excess of historical norms or in excess of what could be explained by the domestic economy.”

Coffey said that due to this volatility in corporation tax, it shouldn’t be something the Exchequer becomes reliant upon.

“I think what we’re highlighting is a corporation tax in general is a very volatile tax receipt,” he said. “It’s also very concentrated for most years, and the top 10 payers account for between 45-50% of those receipts.

So that’s a very significant amount of tax coming from a very small number of taxpayers.

Basing Budget 2020 on a no-deal Brexit scenario was “appropriate” but “the position would have been more favourable if the government had not allowed spending to drift upwards in recent years”, according to the report. 

IFAC also said that repeated overruns in the health service is undermining the sustainability of the public finances, with increased spending by local authorities also carrying a risk.

And, in order to meet such overruns, the government is “again likely to rely on unexpected corporation tax receipts”.

The fiscal watchdog added that the government needs to take a number of actions to try to safeguard the economy going forward.

It includes using the rainy day fund to save temporary sources of income so it’s not used to finance overruns and using sustainable growth rates as a means to producing more realistic forecasts of where the economy is. 

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