Wednesday, 19 June 2019

Questions (23)

Michael McGrath

Question:

23. Deputy Michael McGrath asked the Minister for Finance his plans to manage the risk posed to the public finances and the wider economy in view of the Irish Fiscal Advisory Council's recent warning that our dependence on corporation tax receipts means we are over-reliant on this volatile stream of income; and if he will make a statement on the matter. [25705/19]

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Oral answers (6 contributions) (Question to Finance)

In its recent report on corporation tax, the Irish Fiscal Advisory Council, IFAC, highlighted the volatile nature of corporation tax receipts. There has been a massive increase in the quantum of such receipts in recent years. Our dependence on this level of corporation tax receipts is posing a significant risk to the public finances and the wider economy. What are the Minister's plans to manage that risk?

I am not complacent regarding the risks posed by the increasing share of corporation tax within overall taxation revenues. Along with officials in the Department of Finance, I have identified this risk on several occasions, most recently in the April stability programme update and the Department's annual taxation report. The sharp increase in corporation tax is a notable development in recent years. There are a number of other concerns, including the concentration of receipts within a smaller group of firms. A shock to the corporate tax base cannot be discounted, particularly in light of change and uncertainty in the international policy environment. Sector-specific shocks could reduce corporate profitability with adverse implications for future corporation tax receipts. As I have outlined previously, it is imperative that we ensure increases in public expenditure, particularly current expenditure, are sustainable and are not financed by potentially transient revenue streams. I would like to mention four steps we have taken in this context. A contribution of €500 million is being made to the rainy day fund that has been set up for 2019. We made an effort in this year's budget to broaden our tax base by reversing the temporary tax reduction in the hospitality and service sector. I have an ongoing commitment to seeking to find ways of reducing our national debt via windfall gains. We are aiming to deliver a surplus of 0.2% of our national income this year, and I hope to move to a higher surplus next year. The question of how we can manage this better in the future is an ongoing policy matter. In next week's summer economic statement, I will look at analysing the level of risk further and I will propose options to the Oireachtas for debate across the year regarding how this issue can be managed on a year-to-year basis.

I thank the Minister for his reply, most of which entailed an outline from the Minister's perspective of what has been done to date. I would like to know what new measures he intends to implement in light of the IFAC report. He has said he will outline some of his options in next week's summer economic statement. Can he give us a sense of what he is considering? Can he give a sense of his response to IFAC's key recommendation in respect of corporation tax, which was that a prudence account should be established and used to warehouse excess corporation tax receipts above a certain threshold to enable such receipts to be passed to the rainy day fund or used to pay down debt?

That was its key recommendation in respect of corporation tax. Does the Minister have a view on the council's observation that somewhere between €3 billion to €6 billion of the €10.4 billion in receipts last year from corporation tax could be considered "excess" or outside the normal economic cycle? What is the view of the Minister and his Department on that quite startling conclusion?

In acknowledging what we need to do and given the scale of risk that could develop, it is always worthwhile saying what we have already done. There are two different parts to what I am going to do in further dealing with the matter. First, we will put in place a process that the Deputy in particular has called for to see if we can form a better view regarding the sustainability of current receipts. I emphasise that this will be particularly complex in light of the discussions under way in the Organisation for Economic Co-operation and Development, OECD, regarding the global environment for this tax. Second, I will be looking at benchmarks for how current expenditure can be better managed in future outside the existing fiscal rules proposed by the European Union. Across the coming years, we need to have different benchmarks for how expenditure is managed. I am examining the so-called prudence account but I must establish the benefits of creating a new account or a subset of the rainy day fund, given that the intention of the rainy day fund is to have a location for excess receipts in the first place.

Will the Minister respond to the fiscal council's conclusion on the amount of receipts that could be considered excess? It does not matter which of the three spokespersons on finance is sitting in the Minister's chair when the Irish Fiscal Advisory Council has made the assertion that somewhere approaching 57% of last year's corporation tax receipts could be considered excess. If those receipts disappear, we will have a very large problem because of the huge hole in public finances. What is the early assessment from the Minister and his Department on the conclusion? Is the council accurate in stating that quantum of receipts collected last year cannot be relied on, in essence?

I welcome the Minister's comments on having some form of a review on the sustainability of receipts. It is a key point and I have called for it. Has the Minister carried out any early assessment of the likely impact on our receipts of the emerging changes from the international tax environment, particularly the changes the OECD is now likely to propose that will have an impact on Ireland?

The council indicates that between €3 billion and €6 billion could be considered "excess" and this is the reason I want to put in place a new process to form a view on the sustainability of current receipts. This leads to the Deputy's point on whether we have been able to form a view on the risk that could be posed to our receipts due to the different proposals being considered by the OECD. It is currently too early in the process of the work being done by the OECD to be able to provide an answer on that. We will be in a better place to form a view on the matter by the middle of next year. There are two proposed pillars, one of which relates to a minimum effective global tax rate, with the other relating to the allocation of taxing rights. Where we stand from a revenue perspective will depend on the detail of those two proposals and if a mixture of both is delivered. At this point it is too early to give a view on the trade-offs between increased tax revenue being generated based on where value is located versus the risk of any taxing rights moving to larger markets.