Corporate tax bonanza allows government to spend big and save at the same time – The Irish Times

While the main focus of the 2023 budget is the cost of living, the main driver is corporate tax. The persistence of the corporate tax windfall allows the Minister of Finance Paschal Donohoe to face in fact two paths at once.

He can boast of spending a lot for the cost of living crisis while being prudent in setting aside 2 billion euros for the national reserve fund (state bad weather fund).

The overall €11 billion package, split between €6.9 billion in permanent fiscal and spending measures that will enter the base from 2023 and €4.1 billion in temporary measures, is one of the largest budget outlays on record outside of the Covid era.

This would not have been possible without corporation tax or would have required significant additional government borrowing. And you can see how well it’s doing in the UK.

The government’s pre-budget white paper, published last week, illustrates the bulge in public finances due to corporation tax. He noted that if the windfall element was removed, the government’s expected budget surplus this year of 4.4 billion euros would turn into a deficit of 4.5 billion euros.

Despite repeated warnings about the risk of concentration in having just 10 companies representing more than half of the revenue, the windfall continues to grow. The tax is expected to bring in the public treasury 21 billion euros this year and almost 23 billion euros next year, double that of just a few years ago.

This largesse provides us with financial support in the midst of a cost of living crisis.

Announcing that he would put €2 billion in corporate tax revenue into the national reserve fund this year and €4 billion in 2023, Donohoe said: “These contributions effectively mean that we will have: banked a significant share of additional corporate tax revenue; ensured that no permanent expenditure was financed; and provided the Treasury with additional firepower to meet the challenges of the years to come.

[ Budget 2023 main points: Vacant homes tax introduced, excise reductions on fuel extended, tax credits for renters ]

[ Putting money back in people’s pockets will not offset effects of ongoing inflation ]

[ Do you have a query on how this year’s budget affects you? ]

[ Standard rate income tax threshold rises €3,200 to €40,000 ]

An insider said the corporate tax force likely caught the government off guard (and not for the first time), facilitating the larger-than-expected contribution to the fund.

The darkening economic cloud ahead of us, however, was reflected in Donohoe’s revised forecast for the economy. He predicted that modified domestic demand – the indicator that best reflects conditions on the ground here – would rise by just 1.25% next year. Headline inflation is expected to average 8.5% this year and just over 7% for 2023. These are big revisions.

As real income contracts, it will look like a recession for many households.

Because there are so many moving parts, budgets are hard to gauge. But you couldn’t do worse than to ask three fundamental questions of the 2023 budget: does it keep public finances on a sustainable path? Is this a wise use of public resources? And under the current circumstances, will this add to inflation?

Although the increase in permanent spending breaches the government’s 5% spending rule, core spending remains – more or less – in line with the long-term growth potential of the Irish economy (which is generally valued at around 3%) and, taking into account the impact of the price increase. It can therefore be said that it fulfills the sustainability criteria.

General measures such as energy credits are costly and, although they help poorer households, they also benefit wealthier households who may not need them.

The government will say that there are many middle-income families who earn too much to qualify for support but who are still heavily affected by rising prices and that designing a more means-tested system would be too expensive and too slow.

This means that a lot of public money will end up in the wrong place.

And then there is the question of whether the 2023 budget will be inflationary. Putting more money in people’s pockets when the economy is running at full capacity – we are close to full employment – is not a good idea because it creates additional demand when supply is limited, which exerts a additional upward pressure on prices.

The government will argue that permanent spending is not increasing significantly and that many of the measures to improve the cost of living are temporary and therefore their impact on inflation will be limited. Temporary fiscal measures have become permanent in the past and that is when the impact on inflation could be more problematic.