IRELAND’S FISCAL WATCHDOG has urged the next government to treat the country’s “extraordinary” corporation tax receipts “more like Norway treats its oil”. 

“This means recognising it as a high-risk, finite resource and saving more,” said the Irish Fiscal Advisory Council, which was established to offer an independent view of how the Government manages its budget.

The IFAC said that budget policy by the outgoing government has “lost its anchor” and that just three companies account for over a third of the State’s corporate tax receipts, with a hit to one of these firms potentially resulting in “substantial falls”. 

The warning comes as the same outgoing parties who have been in the watchdog’s firing line over what it considers boom to bust-style budgetary policy hold meetings to figure out their next steps when it comes to forming the next government.

Another Fianna Fáil/Fine Gael-led coalition is on the cards after Micheál Martin’s party secured the largest number of seats of any party at 48, ten more than Fine Gael.

Sinn Féin is the second largest party on 39 seats, but Martin has said he won’t go into coalition with them.

In a statement published today, the IFAC said that the next government can expect steady growth and substantial tax receipts. “Record employment rates and soaring tax receipts are not expected to unwind soon,” it said. 

“This is good. But a lot will depend on two things. First, what happens corporation tax. Second, how the next government sets its budgets.”

The IFAC said the State’s public finances are being kept in surplus by “extraordinary” corporation tax receipts, which could well grow further as tax allowances end and the effective rate rises.

Risk of ‘substantial falls’

“However, these receipts remain high risk. As few as three companies account for about 40% of them. A hit to even a single firm could lead to substantial falls,” the watchdog said.

Last year, Ireland took in just under €24 billion in corporate tax. That number has grown this year, with corporation tax receipts boosting the State’s overall tax take by 15.4% in the first half of this year. 

The IFAC previously said that while a surplus of €80 billion is projected between now and 2030, there is a deficit of €50 billion when corporation tax is excluded.

It has also repeatedly warned the previous coalition against breaking the National Spending Rule in successive budgets, something it did every year since the rule was introduced in 2021. 

The rule in question seeks to keep increases to “core spending” – spending from the Exchequer – at 5% or lower. The figure of 5% was chosen because the economy was expected to grow by about 5% annually for the next few years. 

This year, the fiscal council said Budget 2025 repeated “past mistakes” and said Ireland “needs a more serious vision that delivers on the economy’s needs without repeating the boom-to-bust pattern of its past”. 

Today, the IFAC described how budget policy “has lost its anchor” and that this was “a danger” going forward. 

“Inflation has eased. Yet net spending is growing rapidly. Even with inflation expected to be 2%, expansions are likely to remain high at 8% on average for 2024 and 2025,” it said.

Treat corporation tax ‘the way Norway treats its oil’

It said that while the next government might be tempted to divert more corporation tax to spending increases and tax cuts, “in an already strong economy, this could mean further overspends, bad value for money, and delays”. 

The biggest risk is that budgets continue in this vein and exceptional corporation taxes dry up. This would set public debt on a much riskier course. It would be painful to reverse, especially as pressures from an ageing population mount.

The IFAC made three recommendations to the next government in its statement. It said it should set out a sustainable rule that it will stick to in order to help curb pressures and avoid job losses in a future recession. 

It also said the future coalition should “realistically” plan for health, housing and climate challenges. 

“Ireland is already a high spender in health and housing. But it can get better value for its spend. On climate, Ireland can take more actions sooner to avoid heavy penalties later on,” it said.

Finally, the IFAC said that the next government should “treat its exceptional corporation tax receipts more like Norway treats its oil. This means recognising it as a high-risk, finite resource and saving more.”

Norway established a public fund after it discovered oil in the North Sea in order to shield the country’s economy from ups and downs in oil revenue. The fund also serves as a financial reserve and as a long-term savings plan.

The IFAC chairperson Seamus Coffey said that while Ireland is in a favourable position, a lot depends on how the next government budgets and manages corporation tax.

“The next government should put in place some guardrails in the form of a rule. This would ensure it doesn’t ramp up ongoing commitments as each budget day approaches,” he said.

“A rule and some realistic plans would help to tackle infrastructure deficits, ageing pressures, and climate needs, while also protecting growth, and limiting future job losses.”