Originally posted on Business Post 10 October 2021.
Our circumstances today share numerous parallels with 1991, when Albert Reynolds delivered the first ever televised budget speech
Corporation tax receipts up by an unexpected 40 per cent, inflationary pressures driving a bigger social welfare package, a two-tier corporation tax system, and disputes over pension payments. No, not 2021, but 1991, when the late Albert Reynolds delivered his budget speech, televised for the first time.
This Tuesday will be the same. There will be an economic update and forecast along the lines of “not too bad, but could be better”, a helpful reminder of the wonders achieved by the government in the previous 12 months, and some tinkering with tax bands and reliefs along with some social welfare enhancements and spending commitments.
Is the budget day equilibrium established by Reynolds 30 years ago still appropriate for a nation which has more than twice as many people employed as in 1991, more than two million extra citizens, and eight times the tax receipts?
When it comes to tax policy, neither the Irish economy nor the Irish voter is particularly amenable to any type of radical change. Big initiatives fail. The universal social charge, for example, is little more than a way of squeezing more income tax from a system constrained by having only two tax rates, 20 per cent and 40 per cent.
The guiding principle behind local property tax, meanwhile, seems to be that it should not raise too much money. Water charges, a tax in every respect other than their name, failed to get off the ground at all, while we still tinker with stamp duty rates in the hope they might have some impact on the behaviour of our property market. This is a triumph of optimism over experience.
Since the Reynolds era, however, our control over interest rates and exchange rates has been surrendered to the EU. Last week, we conceded partial control over a third lever of economic policy, the setting of tax rates. To its credit, the government seems to have ensured that this concession on corporation tax was not made lightly.
It would have been simpler for Paschal Donohoe to go along with the 130 or so countries which had already signed up to the OECD twin track proposals to tax the very biggest companies where they make their sales, and to tax the top tier of industry at a rate of at least 15 per cent.
The 12.5 per cent rate had acquired totemic status here as an element of economic policy, but Ireland is not alone in having to abandon its totems. The European Commission surely had to take a deep breath when it signalled it would permit our application for a lower rate for smaller companies under the new plan.
A twin-track tax system runs counter to EU states aid principles – favouring companies falling within a particular category over others was the reason we had to abandon the old, reduced rates of corporation tax in the 1990s.
The allegation that Ireland offered preferential treatments is the rationale behind Margarethe Vestager’s pursuit of the Apple “tax as state aid” case. The commission should now do the decent thing and drop the appeal.
The acceptance of the headline points in the OECD plan is one matter; how they are to be implemented is quite another. The European Commission will transpose key elements of the agreed position at OECD level into a directive for adoption by the EU member countries. Other aspects will be achieved through international treaties.
That is a lot of ground to cover. Ireland’s active participation in these negotiations will be crucial, but Ireland will not be the only country with concerns. Estonia, another EU member, only signed up this week too. None of the changes announced on Thursday will have an impact on exchequer receipts any time soon.
By pushing the corporation tax crisis out of the way for now, Tuesday’s budget can be formulated along more traditional lines. Though the shadow of the pandemic still looms across society and the economy, don't expect too much radical thinking.
Rather than addressing the fundamental question of whether people are paid enough in this country, expect to see some tinkering with the tax bands. Rather than seeing pension funding being put on a model which reflects the nation's demographics, expect to see further tinkering with retirement ages and the benefits package.
Ireland doesn't do alarms or surprises on Budget Day. With the prospect of a two-tier tax system for companies, the Reynolds equilibrium is being fully restored.
Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland
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