The Parliamentary Budget Office (PBO) published its Pre-Budget 2022 commentary. The PBO emphasises the need for increased tax revenues through broadening the tax base, reducing tax reliefs and/or increasing rates, while also reducing the reliance on multinational companies to sustain spending as reflected in the Government’s fiscal strategy.
The commentary sets out the significant spending indicated across health, housing, as well as the need for transition to a low greenhouse gas emission economy and for aging population issues to be addressed.
As a result of the pandemic spending and other measures, Ireland’s debt-to-GDP ratio increased to 59.5 percent, or 105.1 as a percentage of GNI*. The total pandemic support spending, including wages supports, grants and tax measures, over 2020-2021 is estimated at €41.3 billion. This represents one of the largest spending packages in the EU.
The commentary notes that PBO analysis indicates that the associated debt is expected to be sustainable over the next 10 years. The debt is held at fixed rates, so interest rate changes will not have a detrimental impact out to 2030. The commentary notes, however, that the stock of public debt remains high, leaving Ireland exposed to greater refinancing risks in the future.
The commentary calls for fiscal policy to remain supportive, but in a more targeted fashion, in the short term due to the continued uncertainty associated with the pandemic.
The commentary considers some tax issues but notes that the PBO will seek to publish a separate pre-Budget 2022 paper on tax following the publication of the Tax Strategy Group Papers. The resilience of corporation tax receipts, with a view to impending international tax reform is considered in detail. It is recommended that new spending measures should come from more stable sources of revenue. The PBO calls for new estimates on the impact of the OECD’s reforms, whether Ireland signs up or not.
It notes that international tax reform also gives rise to a concentration risk within the income tax base. The combined corporation tax and employment tax revenues from large corporates exceeds €20 billion. The commentary details that the possibility of international companies exiting the Irish market poses a significant systemic risk to the overall tax base.
In relation to the concentration risk within the income tax base, it is detailed that the top 1 percent of earners (28,000 tax cases) paid over one-fifth of income tax receipts. This is noted as a major fiscal risk, and while the progressivity of the income tax system is considered positive from an equity perspective, it is considered to create vulnerability within this source of income.
The commentary calls for an alternative to the current system of VRT, motor tax and excise duty on petrol and diesel in the latter half of this decade. There are also calls for routine reviews of tax expenditures, and that these expenditures should be limited for use in circumstances of demonstrable market failure and where a tax-based incentive is more efficient than a direct expenditure intervention. Table 2 on page 37 of the commentary includes a details of tax expenditures due to expire in 2021.
For more information see the PBO press release.
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