Makhlouf presses for Irish ‘resilience fund’ amid corporate tax spike

Central Bank governor Gabriel Makhlouf urged on Monday that the Government put windfall corporate tax receipts into a new so-called resilience fund, echoing recent calls from the International Monetary Fund (IMF) and the Irish Fiscal Advisory Council (Ifac) that unsustainable income should be set aside.

Mr Makhlouf’s opinion, in a blog published on the Central Bank’s website on Monday, comes as Government faces tough decisions on designing a package to deal with the cost-of-living crisis ahead of Budget 2023 in late September — and as tension mounts with public sector unions over pay.

The Central Bank recently estimated that about €8 billion, or just over half, of Irish corporation tax receipts may potentially be unsustainable or “at risk”. Mr Makhlouf wrote in his blog that it is important the Government does not use such revenue to finance additional permanent current expenditure, as it could drive already high inflation even higher.

“Increases in permanent core expenditure should be funded by permanent revenue-raising measures to avoid introducing a vulnerability in the public finances as well as reducing the risk of creating imbalances in the economy as a result of excess demand,” Mr Makhlouf said.

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He added that “unexplained” corporation tax receipts should be put into a “a resilience fund”.

Rainy-day fund

Minister for Finance Paschal Donohoe opened a so-called rainy-day dund in 2019 and had planned to boost it to €8 billion over time before the Covid-19 pandemic hit and the Government used the €1.5 billion in the fund to help the economy weather a series of lockdowns.

The IMF said in a report on Ireland earlier this month that “given the uncertainty and the volatile nature of [corporate income tax] revenues, they should be treated with caution, allocating any windfalls to either the rainy-day fund or to reduce debt”.

Ifac also said recently that Budget 2023 “involves a delicate balancing act in protecting the economy and poorer households, while avoiding adding to inflation through second-round effects”. It said “over-reliance on corporation tax should be reduced through contributions to the rainy-day fund or a new pension reserve fund”.

Meanwhile, Mr Makhlouf said last week’s move by the governing council of the European Central Bank, of which he is a member, to raise interest rates by half a percentage point was part of an ongoing “normalisation” of monetary policy as the bank sought to rein in inflation, which was running at 8.6 per cent last month across the euro zone.

“Our aim is to dampen the inflationary pressures that we’re seeing in the euro area and achieve our target of 2 per cent inflation over the medium term,” he said. “We are acutely aware of the hardships that current high price increases cause, and are determined to ensure the benefits of price stability for households, businesses and the wider economy are realised.”