Dáil Éireann Debate, Tuesday - 2 May 2017
229. Deputy Barry Cowen asked the Minister for Finance if his Department has explored proposals for setting up a vehicle with the objective of hypothecating or smoothing annual revenues from corporation taxes, in view of the relatively volatile nature of these receipts over time. [19264/17]
Amharc ar fhreagraThe Government’s plan to establish a rainy day fund may go some way towards the intent behind the Deputy’s question. As announced in the 2016 Summer Economic Statement, it is proposed to retain some of the unused fiscal space in 2019, following the achievement of the medium-term budgetary objective in 2018, as a contingency reserve. If it is not deployed in the event of unanticipated adverse shock to the economy, it will be remitted to the rainy day fund. Work is underway on a consultation document to be circulated to the Oireachtas on the proposed operation of the fund and the specific circumstances under which it could be deployed.
Hypothecation involves linking specific expenditure to an explicit revenue source. It is only used in limited circumstances where there is a strong justification because it can cause difficulties for the efficient and effective management of the public finances. Furthermore, it also exposes specific expenditure dependent solely on a hypothecated revenue to any volatility associated with the revenue source in question.
As regards smoothing annual revenues, I assume that the Deputy is suggesting that revenue deemed to be in excess of a set level is paid from the Exchequer into a designated fund and subsequently drawn down from the fund when the revenue falls below the set level in order to maintain expenditure levels.
The basic premise behind the Deputy’s question, that cyclical or windfall revenue should not be spent, is one that the Government agrees with as evidenced by its commitment to comply with the fiscal rules. Under the rules, future permitted expenditure levels are driven by existing expenditure levels and the trend growth rate of the economy. To increase expenditure above the permitted level, discretionary revenue measures, usually tax increases, must be introduced. This is designed to ensure that increases in public expenditure are sustainably financed and it will reduce the danger that additional expenditure is being funded on the back of cyclical or windfall revenues.
The second part of the equation is that cyclical or windfall revenues from corporation tax, or, potentially, other taxes, should be held in a vehicle to be used to fund general expenditure, if and when revenues drop.
Consideration of this would need to reach a view on the appropriateness of holding such money in a vehicle or fund when our general government debt is very high in nominal terms, at over €200 billion. While such a fund would reduce our net debt, it would keep our gross debt at a high level and there would be, in all likelihood, a carry cost to bear. Furthermore, reducing our gross debt will increase our fiscal headroom or borrowing capacity that could be needed in the event of a future crisis and the reduction in gross debt would also reduce our annual interest bill.
The Deputy should also be aware that money transferred to such a fund from the Exchequer would not qualify as expenditure in statistical terms. It would only be when the money is transferred back to the Exchequer and spent that it would impact the general government balance. Unfortunately, the statistical system does not reward funding expenditure by savings put aside in previous years.
The key difference between the rainy day fund and the type of vehicle referred to in the question is that the rainy day fund could only be used to fund expenditure in certain specified circumstances and not as a general funding source.
