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Irish Fiscal Watchdog Warns Over CIT Revenue Volatility

by Jason Gorringe,, London

07 June 2017

The Irish Fiscal Advisory Council (IFAC) has warned against using unexpected corporation tax revenue gains to fund long-term spending increases.

In its latest report on the state of the Irish economy, IFAC noted that successive governments have succeeded in stabilizing the public finances since the economic crisis. It urged that strong adherence to the new budgetary framework is essential if governments are to avoid repeating past policy mistakes.

According to IFAC, fiscal policy "should be cautious reflecting still high debt levels and risks to long-term revenue and growth." IFAC said that it would not be appropriate to spend unexpected revenue gains in 2017 and 2018, and that the Government should instead "maintain a steady pace of deficit and debt reduction."

Among the medium-term risks identified by IFAC is potential volatility in corporation tax receipts, which could be driven by external developments and the concentration of receipts among a small number of firms.

IFAC noted that the past two years have seen "in-year spending increases and a far looser than planned budgetary stance on the back of revenue surprises." It argued that it would have been more appropriate for the government to have used these unexpected funds to reduce the deficit, which would have left the public finances less exposed to potential shocks, such as a reversal in corporation tax receipts.

It calculated that, had corporation tax revenues and interest savings been used for deficit reduction, the budget could have been balanced in 2016.

The report stated: "Using unexpected tax revenues for long-lasting spending increases goes against the spirit of the new budgetary framework, and is especially risky when the source of the additional revenue is corporation tax. In addition, this policy response keeps the deficit and debt higher than could have been achieved, and provides an unnecessary stimulus to an already fast-growing economy."

"Using unexpected revenues to fund permanent increases in expenditure at a time of strong economic growth has worrying echoes of past fiscal policy errors."

Tax revenues for the first quarter of 2017 were down 2.4 percent on target. A stronger revenue performance in May brought the cumulative shortfall against target to 1.4 percent. Income tax receipts were down 2.6 percent on target in the first five months of 2017, with corporation tax receipts EUR185m (USD208m) below target and down EUR2m in year-on-year terms.

IFAC said that "recent developments would suggest that trends in revenues should be closely monitored," and that there needs to be greater certainty as to the reasons for the weaker-than-expected revenues.

TAGS: tax | Ireland | interest | fiscal policy | budget | corporation tax | revenue statistics | individual income tax

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