Gabriel Makhlouf warns before the budget day before taxes and urges restraint

The central bank governor has urged the government to limit spending increases and put excess corporate taxes into a “resilience fund” to avoid further inflation and sovereign debt.

In his annual pre-budget letter to the finance minister, Gabriel Makhlouf said sustained increases in spending could feed price increases and would need to be funded by new taxes.

He urged the government to focus on “temporary, targeted” measures for the most vulnerable households and businesses this winter to help them weather the cost of living crisis.

He warned that high inflation would limit “value for money” in public investment, which he said should focus on “priority projects” such as pensions, healthcare and climate change.

And he warned that Ireland’s “elevated” sovereign debt could pose a risk going forward as investors “focus on fundamentals such as relative debt when pricing sovereign debt.”

“The outlook for the international economy has deteriorated and less favorable conditions could weigh on Irish growth,” Makhlouf wrote in the letter.

“Further stimulation of economic activity through additional permanent current spending would risk creating excess demand and increasing existing price pressures.

“Should there be a risk that temporary measures will ultimately lead to an increase in core permanent spending, other sustainable revenue-raising measures would need to be considered to compensate.”

In a more detailed and prescriptive letter than previous years, Mr Makhlouf warned that record corporate tax receipts were “potentially unsustainable” and posed a “significant fiscal risk”.

According to the Ministry of Finance, corporate income tax is expected to be close to €20 billion this year, double the pre-pandemic level.

Treasury Secretary Paschal Donohoe said last week that how the government uses the fiscal windfall in the 2023 budget will depend “on the level of intervention we have taken to address the real damage and impact” of the cost-of-living crisis.

Mr Makhlouf said in his letter that €8 billion – more than half of last year’s corporate tax receipts – cannot be explained by developments in the underlying economy, making them “potentially unsustainable”.

He also pointed to the well-known “concentration risk” of relying on about 10 large multinationals in the pharmaceutical and IT sectors for the bulk of corporate tax revenues.

“This leaves public finances highly exposed to the business decisions of a small number of companies or to adverse company or sector-specific shocks,” Makhlouf wrote.

“Developments in the Irish economy in the late 2000s underscore the risk of treating potentially transitory revenue streams as permanent revenue.”

He has called for revenue to be “redirected” beyond what is needed for day-to-day expenses and planned investments – such as the National Development Plan – to be set aside in what he calls a “resilience” fund.

Mr Donohoe said last week it was up to the Government to decide whether to divert revenue into some sort of rainy day fund, but he believed “we need to build resilience in the period ahead”. Gabriel Makhlouf warns before the budget day before taxes and urges restraint

Fry Electronics Team

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