Oireachtas Joint and Select Committees

Wednesday, 22 September 2021

Committee on Budgetary Oversight

Pre-Budget 2022 Scrutiny: Irish Fiscal Advisory Council

Mr. Sebastian Barnes:

There were many very good questions. On Brexit, as deadlines get delayed and the new regime is not fully implemented, it may be that we are living in an unusual period, but, as Dr. Bergin said, it is hard to read the data, partly because Covid is going on and many other factors are distorting the numbers. There are many moving parts in the flow of trade, be it to the North, the UK or the Continent, and it is hard to read. That is why we did not say much about it. We are still carefully watching, but it is difficult to read.

On the EU fiscal rules, there is what is called the general escape clause, which the EU has said will likely apply until the end of next year. For the moment, the Commission is providing advice but it is not enforcing the rules as they stand. The existing rules should kick in at EU level at that point and, of course, the domestic rules also apply. One question is whether there will be a change to the rules. There is significant discussion about that. The European Commission has a consultation out. It is unclear what the direction of that is and whether anything will change.

One of our concerns is that the Government has not explained how the running of persistent deficits over several years is consistent with the EU fiscal rules. On the face of it, it does not look as though it is, but the Government should explain its strategy. There may be special circumstances related to the high-level investment Ireland is planning in the years ahead, but the current EU rules do not make any allowance for that. The Government needs to think about this and it may constrain its plans. It needs to make the case, if it wants to go ahead with what it is doing. It is a constraint, which was not addressed in the summer economic statement, SES. This is unfortunate, given these are the fiscal rules to which Ireland is committed.

The third aspect is corporation tax. There is significant discussion internationally and things may change, as a result. It is still very hard, even at a political level, to know what will happen, both internationally and in the US, which is obviously of major interest to Ireland. There are two main channels for the effect. One is a loss of corporation tax revenue. The Government is assuming a loss of €2 billion in its baseline. Our baseline is a bit higher. The kind of work we have done would suggest that with a more prudent approach, more than €3 billion, and potentially, an even bigger figure. The other effect is on the economy. Either some firms will withdraw from Ireland, which seems relative unlikely, or new firms will stop coming here, because it is viewed to be less attractive when some of the tax advantages have gone.

What is difficult is that revenue is concentrated around a small number of companies and the very detailed things one would only know if one was the tax director of one of these companies could have an impact on whether a company continues to pay tax here and it is very hard to predict. That is why we argue that Ireland needs to reduce its dependency on that, because there is significant risk. A lot of money is coming in from a small number of sources, which could change relatively fast.

There are big concerns around costs and capacity in construction. The Government, in Housing for All, has not really explained how it sees these issues playing out and how it sees the capacity in the sector developing. This has economic implications. If there was just a big run-up in costs in those sectors, that could be destabilising to the rest of the economy. It could also just reduce the value for money. There is no point just spending more money and having more demand for construction, if there is no more supply coming. These are things that need to be monitored, particularly as the scale of the investments becomes so large.


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