An Oifig Buiséid Pharlaiminteach Parliamentary Budget Office Post-Budget 2022 Commentary - Publication 33 of 2021
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An Oifig Buiséid Pharlaiminteach
Parliamentary Budget Office
Post-Budget 2022 Commentary
Publication 33 of 2021
Séanadh Is í an Oifig Buiséid Pharlaiminteach (OBP) a d’ullmhaigh an doiciméad seo mar áis do Chomhaltaí Thithe an Oireachtais ina gcuid dualgas parlaiminteach. Ní bheartaítear é a bheith uileghabhálach ná críochnúil. Féadfaidh an OBP aon fhaisnéis atá ann a bhaint as nó a leasú aon tráth gan fógra roimh ré. Níl an OBP freagrach as aon tagairtí d’aon fhaisnéis atá á cothabháil ag tríú páirtithe nó naisc chuig aon fhaisnéis den sórt sin ná as ábhar aon fhaisnéise den sórt sin. Tá baill foirne an OBP ar fáil chun ábhar na bpáipéar seo a phlé le Comhaltaí agus lena gcuid foirne ach ní féidir leo dul i mbun plé leis an mórphobal nó le heagraíochtaí seachtracha. Disclaimer This document has been prepared by the Parliamentary Budget Office (PBO) for use by the Members of the Houses of the Oireachtas to aid them in their parliamentary duties. It is not intended to be either comprehensive or definitive. The PBO may remove, vary or amend any information contained therein at any time without prior notice. The PBO accepts no responsibility for any references or links to or the content of any information maintained by third parties. Staff of the PBO are available to discuss the contents of these papers with Members and their staff, but cannot enter into discussions with members of the general public or external organisations.
Post-Budget 2022 PBO Commentary
Contents
1
Key messages 2
1. Introduction 6
2. Economic and Fiscal Overview 7
3. Fiscal Rules & Debt 15
4. Tax Overview 21
5. Spending Issues 28
Overview 28
Employment and Pay Spending in Central Government 31
Rising Costs & the Delivery of Public Services 33
Social Insurance Fund (SIF) Resilience 36
Universal Basic Income (UBI) 39
Post-Budget 2022 PBO Commentary
Post-Budget 2022 PBO Commentary
Key messages
2
Economic overview
The Irish economy showed resilience during the pandemic. Following the easing of public health
restrictions, a solid economic recovery began in Q2 2021. Both GDP and Modified Domestic Demand returned
to pre-pandemic levels.
Economic activity was significantly better than expected in 2021. In Budget 2022, there were significant
upward revisions to the main economic components. GDP growth is now forecast at 15.6% for 2021.
The economic rebound is a global phenomenon. However, the recovery is uneven worldwide due to different
levels of vaccination. Inflation pressures have emerged due to a mismatch between demand and supply due
to the faster-than-expected recovery.
This rising trend would put pressure on central banks to increase policy rates.
However, there is still uncertainty on whether this trend is temporary, and inflation pressures will dissipate
over time as supply shortages and bottlenecks are resolved.
Concerning energy and commodity prices, Ireland has limited control over global developments. However,
other sectors such as the housing market can be more affected by government policies and are experiencing high
price increases. The Government should monitor these developments and mitigate these risks.
The unemployment rate was 4.8% in January 2020 (vs. a forecast of 7.2% in 2022), highlighting that the labour
market has not returned to pre-pandemic levels. While lower scarring effects from the pandemic are expected,
Government’s policy should limit permanent increases in unemployment or reduction in the labour force.
Post-Budget 2022 PBO Commentary
As a result of the improved economic situation, the public finances performed better than expected in 2021.
The deficit forecast is €13.3 billion for 2021 (vs. €20.3 bn in the SES 2021). The reduction in the deficit compared
to previous forecasts is large. The improvement in the budget balance is mainly due to greater than expected tax
revenue.
Despite the current expectation of continued recovery, this is dependent on the evolution of the COVID-19
pandemic. Uncertainty is still high. COVID-19 infections in Ireland are relatively high and on the rise. Hospitals
are experiencing significant pressures, and intensive care bed capacity is comparatively limited to cope with
an increased number of hospitalisations.
In terms of fiscal rules, Ireland should be on target to meet the core EU fiscal rules from 2022 onwards
(i.e., 60% debt to GDP ratio and 3% deficit to GDP ratio). The fiscal rules were suspended in 2020 and
are likely to be reintroduced from 2023.
While Ireland’s fiscal sustainability does not appear to be a significant risk at present, public debt is high, and the
rainy-day fund was exhausted. This limits the ability to respond to future crises. While Ireland’s fiscal policy and
GDP ratios appear sustainable, there is a significant difference in the GNI* ratios, highlighting possible
underlying risks.
Post-Budget 2022 PBO Commentary
Key Tax Issues
Taxation on income remains the largest source of revenue for the Irish Exchequer. In 2020, revenue collected from
income tax and the Universal Social Charge (USC) was €22.7 billion, equivalent to 40% of total net exchequer tax
receipts for the year. Income taxes are expected to raise €26.0 billion and €27.5 billion in 2021 and 2022
respectively; equivalent to 39% of tax receipts collected in both years. 3
When assessing income taxes as a revenue stream for fiscal vulnerabilities, the PBO is concerned with the highly
concentrated nature of income tax receipts. In 2018 (the most recent year for which data is available), the top 1%
of income earners paid over one-fifth of income tax revenues and the top 25% contributed to
around four-fifths of income tax receipts in that year.
Budget measures (including the increases in the standard rate tax band threshold, the threshold for the second
rate of USC and the changes in tax credits) did not broaden the income tax base.
Value Added Tax (‘VAT’) remains a key source of tax receipts and remains the second largest revenue stream for
the Irish State. In 2020, VAT contributed €12.4 billion in tax receipts, amounting to 21.7% of net exchequer tax
receipts. VAT is forecast to raise tax revenues of €15.4 billion in 2021 and €16.9 billion in 2022. This means that
VAT’s contribution to total tax receipts will rise to 23.3% in 2021 and 24% in 2022.
Budget 2022 extends the reduced VAT rate from 13.5% to 9% for the tourism and hospitality sector until 1st
September 2022. This policy temporarily reduces the revenue generated from VAT. This is a measure intended to
support the recovery of labour-intensive sectors hard hit by the COVID-19 pandemic. The PBO would welcome
further clarity on the potential cost to the exchequer of the measure as the information was not available in the
budget documents.
Revenues collected from motor tax are expected to decline between 2020 and 2025. Revenues from motor tax
are expected to fall from €940 million in 2020, to €925 million in 2021 and €920 million in 2025. This highlights
the need to broaden the tax base due to potential falls in revenue associated with carbon-intensive activities
Post-Budget 2022 PBO Commentary
as the economy decarbonises over time.
Changes to carbon taxes were the largest revenue raising measure in Budget 2022. The PBO welcomes the
inclusion of carbon taxes in budget forecasts for revenue estimates. Carbon taxes raised €494 million in net
receipts for the exchequer in 2020.
Budget 2022 introduced some measures to raise revenue such as increases in carbon taxes, changes to VRT,
an extension of the bank levy (although the revenue will be lower as a result of Ulster Bank and KBC leaving the
Irish market) and increased taxation on tobacco products.
The Irish Exchequer has become reliant on Corporation Tax as a source of revenue. In 2020, corporation tax
contributed €11.8 billion in tax receipts (mainly from large multinational companies based in Ireland), an
increase of €1 billion or 8.7% on the previous year. In 2021, corporation tax receipts are expected to increase by
a further €2 billion or 17.4% year-on-year to a record €13.9 billion. By comparison, corporation tax raised
€3.9 billion in 2009, representing 11.7% of the total tax take in that year.
Corporation Tax receipts are now at their highest level ever and account for 21% of the total tax take.
That is, just over one in five euros raised for the exchequer this year will be from corporation tax receipts.
Post-Budget 2022 PBO Commentary
There are concerns about the resilience of these tax receipts, especially due to global corporation tax changes
through the OECD’s Base Erosion and Profit Shifting (BEPS). There is a risk that the State is too reliant on this
volatile revenue stream, mirroring the experience of relying on stamp duty and transaction-based taxes during
the ‘Celtic Tiger’ era.
Budget 2022 forecasts that Corporation Tax receipts will increase from 2021 to 2025. Budget 2022 forecasts that
4
corporation tax revenue will increase from €13.9 billion in 2021 to €14 billion in 2022 and rise to almost €15.2
billion in 2025. Budget 2022 estimates of corporation tax revenue out to 2025 projects an increase of around €2
billion each year compared to the SPU.
This forecast includes the impact of the OECD BEPS agreement on corporation tax revenues which is projected to
reduce annual corporation tax receipts by €2 billion by 2025. Given the potential impact of BEPS, Budget 2022
forecasts for corporation tax revenue in 2024-2025 may be optimistic, in light of the SPU 2021 forecast for
modest growth in corporation tax.
Another key concern for the PBO is the high concentration of corporation tax receipts due to the overreliance on
a small number of large firms and the foreign-owned multinational sector. In 2020, the top ten companies
accounted for €5.9 billion or 51% of net corporation tax receipts, constituting 10% of the total tax receipts in
that year.
The PBO would welcome the publication by the Department of Finance of a comprehensive scenario analysis on
corporation tax receipts and any potential impact on the sustainability of the public finances in the context
of global changes to corporation tax regimes due to agreed OECD-led changes.
Spending Overview
The Budget is not only an opportunity to introduce new measures, but also to review current policy interventions
and delivery of public services to determine if they continue to represent value for money (VfM) i.e. that their
Post-Budget 2022 PBO Commentary
stated objective(s) remain valid and expected outcomes are being achieved.
Failure to adequately review policies, schemes, and services to ensure the effective and efficient use of public
monies risks undermining the budgetary process. Focussing on new measures and additional spending only
leads to a disproportionate focus on €4.19 billion of new ‘core’ spending projected in 2022 – which represents
just 5.23% of projected core spending in 2022, effectively ignoring the balance of €75.89 billion.
The inclusion of unallocated spending as a constituent part of increases in budgetary spending to 2025
should be carefully monitored.
Employment and Pay Spending in Central Government
Public service employment associated with Votes is projected to grow from 335,541 in 2021 to
350,048 (+14,507/+4.3%).
Increased staffing levels alongside commitments in Building Momentum – A New Public Service Agreement
2021-2022 (December 2020) contribute to projected gross Exchequer pay for 2022 of almost €21.9 billion.
Post-Budget 2022 PBO Commentary
Rising Costs & The Delivery of Public Services
Increases in the price of raw materials, energy costs, and labour shortages may impact the value for money of
Exchequer investment.
The costs of providing housing units may suffer from a feedback loop should measures to provide social
and affordable housing simply result in competition for existing housing stock rather than contributing to 5
increasing supply itself. Such a feedback loop would result in driving further increases in costs, drive the
need for market supports, while also reducing the VfM achieved from public spending.
Social Insurance Fund (SIF) Resilience
Failure to adequately match income to the changes in SIF spending can erode the Fund’s resilience in the face
of adverse economic conditions. Surpluses generated from economic development and growth in employment
are swiftly eroded during a downturn, requiring a funding intervention from the Central Fund.
The resilience of the Social Insurance Fund to adequately meet the funding expectations of future pension
commitments remains a concern, with annual pension related shortfalls in SIF income over expenditure of
€2.3 billion by 2030, rising to €21 billion per annum by 2070 being forecast.
Addressing the cost pressures associated with starting a family, or rearing children, can have both a short-term
impact on SIF funding while also offsetting some of the old-age dependency ratio related issues in the coming
decades. Developing measures that enhance labour force participation, and which contribute to smoothing of
demographic trends (in this case by facilitating family formation) can help mitigate some of the pressures
which the SIF will face.
Universal Basic Income
Post-Budget 2022 PBO Commentary
A pilot project to investigate the sustainability of the Arts sector impacted by COVID-19 may provide a template
of reference for the Low Pay Commission to consider the feasibility of a Universal Basic Income.
Post-Budget 2022 PBO Commentary
1. Introduction
6
The PBO has prepared a post-Budget 2022 commentary in order to assist Members with their consideration of
the Budget, and the implications of this. This document is intended to complement the PBO’s Preliminary Review of
Budget 2022,1 which is prepared on Budget night. As such, it begins by expanding on the economic and fiscal context,
including two detailed boxes. These boxes look at a) inflation and risk, and b) the Government’s forecasts vs outturn.
These economic and fiscal calculations underpin the revenue expected, and the PBO has expanded on its tax analysis
from Budget night and the pre-Budget tax document2. Finally, the PBO has provided further detail on certain spending
areas, including wider issues such as public sector numbers, capital expenditure, and universal basic income.
Post-Budget 2022 PBO Commentary
1 Parliamentary Budget Office, Preliminary PBO Review of Budget 2022
2 Parliamentary Budget Office – An Assessment of the Resilience, Sustainability and Vulnerabilities of the Irish Tax Base – Publication 26 of 2021
(oireachtas.ie)Post-Budget 2022 PBO Commentary
2. Economic and Fiscal Overview
7
A quick economic recovery began in Q2 2021 due to the success of the vaccination programme (e.g. 92% of the Irish
population over 18 is fully vaccinated against COVID-19 vs. 75% of adults in the EU)3 and the consequent easing of
public health restrictions. The economic rebound has been strong. Figure 1 shows that in the second quarter of 2021
(April to June), GDP was 20% higher than pre-COVID-19 levels (Q4 2019). Modified Final Domestic Demand (MFDD),
a better proxy for the domestic economy, also returned to pre-pandemic levels in Q2 2021.
Figure 1: The economy has surpassed pre-pandemic levels
130
120
Index, Q4 2019=100
110
100
90
80
70
2019 Q4 2020 Q1 2020 Q2 2020 Q3 2020 Q4 2021 Q1 2021 Q2
MFDD GDP
Post-Budget 2022 PBO Commentary
Source: PBO based on CSO data
Overall, economic activity was significantly better than expected in 2021. In Budget 2022, GDP growth is forecast at
15.6% (vs. 8.8% in the Summer Economic Statement (SES) 2021 in July). There are significant upward revisions to the
main components of GDP (see Figure 2), particularly Exports (+16.1% year-on-year growth) and Personal Consumption
(+6.8%), which are the main drivers of economic growth in 2021. The Department of Finance forecast that GDP will
increase on average by 4.1% over 2022-2025, highlighting the expectation of a positive outlook for the economy.
3 COVID-19 Vaccine Tracker | European Centre for Disease Prevention and Control (europa.eu)Post-Budget 2022 PBO Commentary
MFDD GDP
Figure 2: Revisions to GDP components (from SPU 2021)
12
percentage points (pp) differences
10
8 8
6
4
2
0
-2
-4
2021 2022 2023 2024 2025
Personal consumption Government consumption Modified investment
Exports Modified imports
Source: Budget 2022 (Economic and fiscal outlook) and Stability Programme Update 2021
The economic rebound from the pandemic is a global phenomenon. The OECD4 forecast that GDP in G20 advanced
economies will return to pre-pandemic levels at the end of 2022. However, the recovery is uneven worldwide due
to different vaccination levels, particularly in emerging and low-income economies.
Inflation pressures have emerged clearly due to a mismatch between demand and supply as a result of the faster-than-
expected economic recovery. Input prices have been increasing, including commodities and shipping prices, pushing
up inflation. In the Euro Area, annual inflation was 3.4% in September 2021, up from -0.3% a year ago.5 The highest
Post-Budget 2022 PBO Commentary
contribution to the inflation rate came from energy (+1.63 percentage points, + 17.6% year-on-year growth), followed
by services (+0.72 pp) – see Figure 3a. Therefore, Budget 2022 revised inflation forecasts upwards, with an inflation
forecast at 2.3% for 2021 (Figure 3b). The inflation rate averaged near 0% over January 2015 – March 2021.
This rising trend would put pressure on central banks to increase policy rates. There is still uncertainty on whether this
trend is temporary, and inflation pressures will dissipate over time as supply shortages and bottlenecks are resolved.
However, as of now, the consensus is that this should be a temporary surge in inflation. The government should
continue to monitor these developments.
4 OECD Interim Economic Outlook, 21 September 2021
5 Eurostat, Inflation in the euro areaPost-Budget 2022 PBO Commentary
Figure 3a: Contributions to the euro area annual Figure 3b: inflation forecasts
inflation rate (pp)
2.5
Services
2.0
9
Non-energy
industrial goods 1.5
%
1.0
Energy
0.5
Food, alcohol,
& tobacco
0.0
0.0 0.5 1.0 1.5 2.0 2021 2022 2023 2024 2025
HICP Budget 22 HICP SPU 2021
average HICP (2015-2021M3)
Source: Eurostat, CSO, Budget 2022 and Stability Programme Update 2021
Concerning energy and commodity prices, Ireland is a price taker and has limited control over global developments.
However, other sectors of the economy can be more affected by government policies and are experiencing high price
increases. This is the case for the housing market (see Figure 4). For example, the residential property price index
(houses and apartments) increased nationally by 10.9% in August. The growth in rents has decelerated since the
onset of the pandemic. Despite this, rents have continued to grow with the average monthly rent in Dublin at
€1831.65 in Q2 2021 vs. €1276.24 in Q2 2015. The inflation issue is explored in more detail in Box 1.
Figure 4: House Prices growth
Post-Budget 2022 PBO Commentary
14
12
Residential Property Price Index
% Change over 12 months for
10
8
6
4
2
0
-2
-4
2019M01
2019M02
2019M03
2019M04
2019M05
2019M06
2019M07
2019M08
2019M09
2019M10
2019M11
2019M12
2020M01
2020M02
2020M03
2020M04
2020M05
2020M06
2020M07
2020M08
2020M09
2020M10
2020M11
2020M12
2021M01
2021M02
2021M03
2021M04
2021M05
2021M06
2021M07
2021M08
National – all residential properties Dublin - all residential properties
National excluding Dublin - all residential properties
Source: CSOPost-Budget 2022 PBO Commentary
Box 1: Inflation & Risk
While inflation has been comparatively low in recent years, in 2021, it has increased significantly, both in Ireland
and internationally. By the late third quarter, the consumer price index increased by 3.7%6 and the residential
property prices index by ~11%.7
10
Inflation would pose a risk to the standard of living for consumers and for the sustainability of public finances in
so far as it would affect expenditure costs, especially for capital investment. Inflation has also historically resulted
in pressure for higher wages, increasing labour costs. There is uncertainty as to whether current inflation would
be transitory or a lasting issue.
Figure 5: Harmonised Index of Consumer Prices vs GDP Deflator
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
HICP GDP Deflator Projected HICP Projected GDP Deflator
Post-Budget 2022 PBO Commentary
Source: CSO, Department of Finance
6 CSO, Consumer Price Index, (September 2021). Consumer Price Index September 2021 – CSO – Central Statistics Office
7 CSO, Residential Property Price Index, (August 2021). Residential Property Price Index August 2021 – CSO – Central Statistics OfficePost-Budget 2022 PBO Commentary
The Harmonised Index of Consumer Prices (HICP) measures consumer price inflation, harmonised to be
comparable in methodology between the Eurozone. The gross domestic product (GDP) deflator represents
the difference between the nominal GDP growth and the real GDP growth to reflect how prices are not constant.
There is a risk that the inflation rate could be higher than current economic projections.
11
Figure 6: Change in Property Price, Rents and Earnings
20.00%
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%
-20.00%
-25.00%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Property Price Change Actual Rent Paid Change Average Total Earnings Change
Source: CSO
For the past decade, wages have not kept up with the cost of housing. In particular, the price of rent has
approximately doubled since 2011 in high-demand areas. Rent and property prices changes are not always
directly correlated.
Post-Budget 2022 PBO Commentary
As shown in Figure 6, house prices and rents followed similar paths from 2006 to 2010/2011. From that point, while
rents began to increase steadily, house prices continued to decrease until 2013. From 2014 and up until the onset
of the COVID-19 pandemic, house prices experienced strong growth. Over 2014-2019, house prices increased on
average by almost 10% a year, while rent growth in Dublin was nearly 8%. Ireland experienced one of the highest
increases in rents in the EU since 2010 – +63% (2021 Q1 vs. 2010).8
8 Eurostat.Post-Budget 2022 PBO Commentary
This would make Ireland an outlier from most other Eurozone nations, with stronger rental regulations. In addition,
Ireland would have one of the lowest proportions of households living in apartments in the Eurozone.
The exact impact of inflation on wages remains unclear. According to the short-run Phillips curve (i.e., the primary
economic forecasting model linking unemployment to inflation), the decreasing unemployment rate is likely to
12
drive earnings up as workers demand higher wages.
Figure 7: Change for Dublin in Property Price, Rent, and Earnings
30.00%
20.00%
10.00%
0.00%
-10.00%
-20.00%
-30.00%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Dublin Property Price Change Dublin Rent Price Change Average Total Earnings Change
Source: CSO
Dublin has seen significant increases in housing and the cost of living, more so than the rest of the country.
This is in part due to the demand for people to move to Dublin for work opportunities. The majority of the tax
Post-Budget 2022 PBO Commentary
base is located in the greater Dublin area.
Many rural regions have become proportionally older and less economically significant due to continued migration
to cities. Vacant property remains an issue in rural areas. It is uncertain whether remote working would affect the
demand for housing in Dublin compared to rural regions.
The overall economy has shown resilience during the pandemic, primarily due to the contribution of foreign-owned
multinational companies. However, the COVID-19 pandemic has had a significant adverse impact on the labour market,
particularly young people working in consumer-facing sectors where it is impossible to work from home. From Q2 2021,
the labour market situation has improved significantly (Figure 8a). Under 100,000 people were on the Pandemic
Unemployment Payment (PUP) on the 21st of October. In February 2021, there were almost 500,000 on the PUP. In
Budget 2022, the unemployment rate is forecast to be 16.3% for 2021, but it is expected to fall to 7.2% in 2022 and
5.5% in 2025 (Figure 8b). The unemployment rate was 4.8%9 in January 2020, highlighting that the labour market has
not returned to pre-pandemic levels. While the Department now expects lower scarring effects from the pandemic, it will
be important that the Government’s policy limits permanent increases in unemployment or reduction in the labour force.
9 Seasonally adjustedPost-Budget 2022 PBO Commentary
Figure 8a: PUP reduction Figure 8b: unemployment forecasts
700,000 18
16
600,000
14
500,000
12
13
400,000 10
%
300,000 8
6
200,000
4
100,000
2
0 0
PUP 21 Oct Peak Feb Peak May 2021 2022 2023 2024 2025
2021 2020
Unemployment (rate) – Budget 22
Unemployment (rate) – SES
Unemployment January 2020
Source: Department of Social Protection, CSO, Budget 2022 and Summer Economic Statement 2021
As a result of the improved economic situation, the public finances performed better than expected in 2021. The deficit
forecast is €13.3 billion for 2021. Last year, the government expected to run a deficit of €20.5 billion (then revised up to
€20.3 bn in the SES 2021). The improvement in the budget balance is due to both higher than expected tax revenue and
lower spending. Figure 9 shows how these forecasts have changed.
Figure 9: Forecasts for Key Fiscal Variables
120
Post-Budget 2022 PBO Commentary
100 109.2 108.6 106.4
90.5 93.1
80 88.7
60
Billion €
40
20
0
-20.5 -18.1 -13.3
-20
-40
General Government General Government General Government
Revenue Expenditure Budget Balance
Budget 2021 SPU 2021 Budget 2022
Source: Budget 2022, Stability Programme Update 2021 and Budget 2021
Overall, due to a better-than-expected level of economic activity, General Government Revenue in 2021 is expected to be
€4.4 billion higher than what was predicted last year (€2.6 bn higher than SPU 2021). General Government Expenditure
(€106.4 billion) was lower than last year’s Budget (€109.2 billion). The deficit is projected to reduce to €8.26 billion in
2021. This reduction will continue until the Government finances return to a surplus in 2025.Post-Budget 2022 PBO Commentary
In Budget 2022, there is a noticeable reduction in the deficit compared to previous forecasts, particularly from 2023
onwards (see Figure 10). Between the SPU and Budget 2022, while the growth rates for revenue and spending have not
changed significantly post 2021, the most significant difference is a higher-than-expected revenue projection for 2021.
This inflates the base for future revenue growth. In light of the potential risks to corporation tax receipts, this might be
an overly optimistic assumption.
14
MFDD GDP
Figure 10: General Government Balance
1.0%
0.0%
-1.0%
% of GDP
-2.0%
-3.0%
-4.0%
-5.0%
-6.0%
2020 2021 2022 2023 2024 2025
SPU 2021 SES 2021 Budget 2022 Fiscal Rules 3% deficit target
Source: Stability Programme Update 2021, Budget 2022, and SES 2021
Despite the success of the vaccination programme and the current expectation of continued recovery, the economy,
especially the domestic side, is highly dependent on the evolution of the COVID-19 pandemic. Uncertainty is still high,
and the main risk relates to the emergence of more contagious and vaccine-resistant variants. At the time of writing,
Post-Budget 2022 PBO Commentary
winter is approaching (with the associated increase in respiratory illnesses), and COVID-19 infections in Ireland are
relatively high and on the rise. Hospitals are also already experiencing significant pressures10 and beds capacity,
particularly intensive care beds capacity, is comparatively limited (one of the lowest per 100,000 population in the
OECD11) to cope with a high number of hospitalisations.
While COVID-19 vaccine booster shoots and the continuation of preventive public health measures (e.g., face covering,
remote working, etc.) could mitigate against these risks, a deterioration of the COVID-19 situation could have a knock-on
impact on the economy.
10 Total of 2,029 cases of Covid-19 confirmed as HSE warns procedures will be cancelled if numbers rise (irishtimes.com)
11 https://www.oecd.org/coronavirus/en/data-insights/intensive-care-beds-capacityPost-Budget 2022 PBO Commentary
3. Fiscal Rules & Debt
15
Ensuring the State’s fiscal sustainability has been especially important in the wake of the 2008 global financial crisis.
The EU fiscal rules are currently temporarily suspended due to the “Exceptional Circumstances” of COVID-19 and are
likely to be reintroduced from 2023.12
The general government balance is defined as the balance of income and spending by government, including capital
income and capital expenditures and interest payments. Budget 2022 figures indicate that Ireland should return to EU
fiscal rules compliance when they are reactivated, likely, in 2023.
MFDD GDP
Figure 11: Structural Budget Balance (per cent GDP)
0.5%
0.0%
-0.5%
-1.0%
-1.5%
-2.0%
-2.5%
2020 2021 2022 2023 2024 2025
Post-Budget 2022 PBO Commentary
Budget 2022 SPU
Medium-term budgetary objective Fiscal Rules if debt ratio below 60%
Source: Department of Finance SPU, Budget 2022
The structural budget balance is the government’s actual fiscal position minus the estimated budgetary impact of
the economic cycle and temporary/once-off measures. It is designed in part to indicate the medium-term orientation
of fiscal policy. EU budgetary rules indicate that Ireland should strive for its structural budget deficit to be no greater
than 0.5% of GDP (if the debt ratio is below 60%, then 1% would be the maximum allowed according to the EU rules).
Budget 2022 structural balance estimates are far more favourable than those from the Spring SPU (see Figure 11).
These largely reflect improvements in the general government balance due to higher-than-expected revenue and lower
government spending. The structural deficit is significantly lower than the general government deficit (-0.2% vs. -3.1%
for 2021). This reflects that a significant component of COVID-19 emergency spending has been treated as once-off and
subtracted from the structural balance.
12 European Commission, Recommendation for a Council recommendation delivering a Council opinion on the 2021 Stability Programme of Ireland,
(June 2021).Post-Budget 2022 PBO Commentary
Figure 12: Output gap (per cent of potential GDP)
1.0%
0.5%
0.0%
16 -0.5%
-1.0%
-1.5%
-2.0%
-2.5%
-3.0%
2020 2021 2022 2023 2024 2025
SPU 2021 Budget 2022
Source: Department of Finance SPU, Budget 202213
The output gap is the difference between actual and potential GDP, expressed as a percentage of potential GDP. It is used
to estimate the cyclical position of an economy. If the output gap is negative, this would indicate slack in the economy
due to weak demand. By contrast, the economy is assumed to be at risk of overheating if the output gap is positive.
It is generally advisable to follow a countercyclical policy approach and close the output gap to prevent the economy
from overheating or under-heating. The Budget 2022 figures would achieve this from 2022 to 2025, as the output gap
is projected to close rapidly over the period (Figure 12).
MFDD GDP
Figure 13: General Government Debt (per cent GDP)
Post-Budget 2022 PBO Commentary
65.0%
60.0%
55.0%
50.0%
45.0%
40.0%
2020 2021 2022 2023 2024 2025
SES SPU Budget 2022 Fiscal Rules
Source: Department of Finance SPU, SES & Budget 202214
13 DoF, Budget 2022: Economic and fiscal outlook, (October 2021).
14 IbidPost-Budget 2022 PBO Commentary
The EU fiscal rules require a debt to GDP ratio of below 60%. The revised Budget 2022 figures indicate that Ireland
should remain within these requirements due to better-than-expected revenue and GDP growth figures (Figure 13).
The updated PBO’s Debt Sustainability Analysis Calculator Budget 2022 allows one to stress test compliance of fiscal
rules in different scenarios and view debt sustainability projections out to 2050. Ireland has exhausted its rainy-day
fund, and the Government intention is not to transfer money into it this year15.
17
While EU fiscal rules are based on GDP, Ireland, primarily due to the activity of multinational companies and
international finance, has, alongside Luxembourg, a disproportionally inflated GDP figure in comparison
to other EU countries.
GNI* (Modified Gross National Income) is an indicator designed to exclude globalisation effects that disproportionally
impact the measurement of the size of the Irish economy. This is particularly relevant considering the economic reliance
on major MNEs (multinational enterprises)16. Ultimately while Ireland’s fiscal policy and GDP ratios appear sustainable,
there is a significant difference for the GNI* ratios, which highlight possible underlying risks.
It is welcomed that the Economic and Fiscal Outlook provides detailed economic material calculated as a percentage of
GNI*, rather than GDP. This gives a more accurate picture of Ireland’s economic position, but can make comparisons over
time complicated. The draft budgetary plan17 published on October 15th shows economic indicators as a percentage of
GDP, as required by the European Commission.
Additional risks
Inflation developments may impact interest rates and possibly increase market pressure for higher interest rates in order
to provide a real return on investment after inflation. The pre-existing policies of quantitative easing are currently under
review by many central banks internationally. A rise in international interest rates, prevailing bond market volatility, and
to a lesser extent, inflation would all pose a risk to Ireland’s public finances and borrowing potential in the future.18
Post-Budget 2022 PBO Commentary
The Draft National Risk Assessment 202119 identifies the listed strategic level risks for the State, any of which could
have a knock-on effect on the economy and government policy. Multiple overlapping simultaneous threats, as seen
with the cyberattack against the HSE and the Department of Health at the same time as an ongoing pandemic,
would be disproportionally dangerous and costly.
As mentioned, since the third quarter of 2021, global shortages of certain commodities have become apparent.
In particular, the significant rise in the price of coal and natural gas, hence electricity, may become problematic if
it proves permanent rather than a temporary shock. Energy commodities, in particular, are suffering both from
transportation difficulties and from market demand. Increased energy prices would affect the standard of living
for individuals, and also have an impact on businesses’ costs.
15 Cabinet agrees not to make €500 million payment into the country’s rainy day fund (thejournal.ie)
16 PBO, Ireland’s dual economy, (September 2021). 2021-09-15_ireland-s-dual-economy_en.pdf (oireachtas.ie)
17 Government of Ireland, Draft Budgetary Plan
18 CBI, Financial Stability Review I, (June 2021). https://www.centralbank.ie/publication/financial-stability-review/financial-stability-review-2021-i
19 Department of the Taoiseach, Draft National Risk Assessment, (July 2021). https://www.gov.ie/en/consultation/10488-draft-national-risk-assessment-
20212022-public-consultation/?referrer=http://www.gov.ie/en/publication/8670d-draft-national-risk-assessment-20212022-public-consultation/Post-Budget 2022 PBO Commentary
Box 2: Projections vs Outcome
Forecasting is a valuable tool as it gives the government the ability to make informed decisions and develop
data-driven strategies. Fiscal decisions are made based on current market conditions and predictions on how
the future looks, allowing the State to be proactive instead of reactive. Forecasts help to plan for the future,
18 evaluate progress and implement changes to achieve desired outcomes. However, errors persist, and they
occasionally lead to bad decisions. Failure to forecast accurately can lead to inefficiencies, higher costs, and
reduced belief in policy-makers.
As part of the material published with Budget 2022, the Department of Finance (DoF) published a number of
tables showing economic forecasts compared to the eventual outturn of these indicators20. While the tables are
informative, particularly on GDP and inflation, the DoF doesn’t provide information on the national debt figure or
tax revenue. These factors are very important when the government is financing social projects or trying to solve
national problems such as inflation. The forecasts included are from the SPU and Budget, named the Spring and
Autumn forecasts in the tables. These help to show the changes in forecast over time, and thus can be used to see
the forecast error in each indicator, and the accuracy both for near term forecasts (i.e. forecasts for the current
year and next year) and longer-term forecasts (i.e. accuracy over three to five years.)
National Debt
Figure 14b shows Ireland’s national debt from 2016 to 2020, including the 2021 forecast. From 2016 to 2020,
the Spring report (Stability Update Programme, SPU) was relatively accurate in its end-year forecasts, with the
highest error rate coming in 2017 when the national debt was €3.2bn (1.6%) lower than expected. The Autumn
report (Budget) in the same period, shows a higher error rate on average, with the greatest differential coming in
2020. The Autumn forecast was €19.7bn (9%) below outturn in 2020. This high error rate can be attributed to
increased health restrictions and the national lockdown caused by COVID-19.
Figure 14a: Debt forecast in 3 years Figure 14b: National Debt
Post-Budget 2022 PBO Commentary
Outturn
2018 Forecast
2017 Forecast
2020
220.0 240.0
2019 Forecast
2020 Forecast
215.0
2018 Outturn
230.0
2019 Outturn
210.0
2017 Outturn
220.0
Billions (€)
Billions (€)
205.0
210.0
200.0
200.0
195.0
190.0 190.0
2014 2015 2016 2017 2016 2017 2018 2019 2020 2021
Predicted debt in 3 years Spring Report Autumn Report
Outturn Outturn
Source: SPU, Budget, Department of Finance
20 Database of past forecastsPost-Budget 2022 PBO Commentary
Figure 14a looks at advance forecasts for each year and compares them to what the outturn was. For example, the
Spring 2014 prediction was that in three years’ (2017), the national debt would be €213.5bn (shown in purple). In
fact, the debt was much lower at €201.3bn or -5.7% (shown in orange). The forecast error rate declined each year
until 2017. The 2017 three-year forecast estimated that national debt would be €209bn in 2020, it did not predict
COVID-19 and was unable to predict the surge in debt needed to combat the pandemic. The outturn was €218.2bn 19
or 4% higher than was initially forecast.
GDP
2015 is excluded from this analysis as it is an outlier, using it may skew the data and provide an inaccurate
representation. Between 2016 and 2020 outturn was on average 4.08 percentage points greater than the Spring
forecast and 1.9 percentage points greater than the Autumn forecast. Since 2016, the average three year predicted
growth was 3%, average GDP outturn was almost double that at 5.7%.
Tax revenue
From 2016 to 2019, average tax revenue forecasts made in the Spring and Autumn reports had an average
difference from end of year outturn of 1.2%. As shown in figure 15a, the 2020 Spring forecast was €6.6bn or
13.39% less than the outturn. The Autumn report over estimated tax revenue by €4.9bn or 9%. Figure 15b shows
how forecasts differentiate from outturn in three-year periods. In 2017 outturn was 10.7% greater than what
was forecast in 2014. In 2020, outturn was down 5% compared to the 2017 forecast.
190.0
Figure 15a: Tax Revenue Figure 15b: Three year Tax revenue forecast
2020 Forecast
2019 Outturn
63000.0 65000.0
2020 Outturn
61000.0
2019 Forecast
2018 Outturn
Post-Budget 2022 PBO Commentary
59000.0 60000.0
2017 Outturn
2018 Forecast
57000.0
55000.0
Millions (€)
Millions (€)
55000.0
2017 Forecast
53000.0
50000.0
51000.0
49000.0 45000.0
47000.0
45000.0 40000.0
2016 2017 2018 2019 2020 2021 2014 2015 2016 2017
Spring Report Autumn Report Predicted tax revenue in 3 years
Outturn Outturn
Source: SPU, Budget, Department of FinancePost-Budget 2022 PBO Commentary
Inflation
Figure 16a maps the inflation rate compared to the Spring and Autumn reports. These reports have accurately
predicted inflation with a relatively small margin of error (0.1 percentage point) since 2016. Figure 16b shows
that average inflation predicted was 1.74% per year since 2016, however inflation was closer to 0.35% per year.
20
Every year inflation has been at least 1 percentage point less than predicted, with the biggest difference of 2.4
percentage points coming in 2020.
190.0
Figure 16a: Inflation rate Figure 16b: Three year Inflation forecast rate
2018 Forecast
2017 Forecast
2.5
Forecast
2.5
Forecast
2019
2020
2.0 2.0
2019 Outturn
2018 Outturn
Percentage change (%)
1.5 1.5
Percentage change
2017 Outturn
2020 Outturn
1.0 1.0
0.5 0.5
0.0 0.0
-0.5 -0.5
-1.0 -1.0
2016 2017 2018 2019 2020 2021 2014 2015 2016 2017
Spring Report Autumn Report Predicted inflation in 3 years
Outturn Outturn
Post-Budget 2022 PBO Commentary
Source: SPU, Budget, Department of Finance
The government uses economic forecasts to help determine its strategy, multi-year plans, and budgets for
the upcoming year. The above charts have shown how medium-term government forecasts can vary greatly
to outturn. When forecasting debt, real GDP, tax revenue, and inflation there are time-varying, distorted
information, and partly predictable risks. Forecasting errors can be partly attributed to the existence of black
swans and continued uncertainty in the market. The difference between forecasts and outturn highlights the
uncertainty around forecasting. Thus, it is important to regularly evaluate government forecasts and consider
the methodology behind these, in order to reduce forecast error as much as possible.
The Department of Finance is required to commission regular independent evaluation of its official macroeconomic
forecasts in order to ensure that there is no significant bias affecting the forecasts21. A previous example of this is
Jim Power’s report Evaluation of the Department of Finance’s Macroeconomic and Fiscal Forecasts 2013-201622.
21 S.I. No. 508/2013 – European Union (Requirements for Budgetary Frameworks of Member States) Regulations 2013. (irishstatutebook.ie)
22 Jim Power (2018) Department of Finance’s Macroeconomic and Fiscal Forecasts 2013-2016Post-Budget 2022 PBO Commentary
4. Tax Overview
21
The Irish Exchequer is forecasted to collect €66.1 billion in tax revenue in 2021, compared to €57.1 billion collected
in 2020. This represents an annual increase of just under €9 billion or 15.7%. The higher tax intake is evidence of an
improving macroeconomic situation as the economy recovers from the shock caused by the COVID-19 pandemic. This is
due in part to the progression of the vaccine rollout, the easing of public health restrictions, the recovery in the labour
market, and the partial unwinding of the build-up in savings.
The largest contributors to total tax revenue in 2021 will be income tax (€26 billion), VAT (€15.4 billion) and corporation
tax (€13.9 billion). At an estimated €13.9 billion, corporation tax receipts would constitute 21% of total tax receipts, its
highest share of total tax receipts on record.
It should be noted that the forecasted €66.1 billion in tax revenue in 2021 is higher than the €60.4 billion estimated in
the Stability Programme Update (SPU) published by the Department of Finance in April of this year. Tax receipts are now
expected to be €5.7 billion or 9.4% ahead of profile compared to the SPU. This outperformance has been predominantly
driven by Corporation Tax (€2.25 billion higher than forecast in the SPU), Income Tax (€1.7 billion) and VAT (€1 billion).
Other tax streams are also outperforming the forecasts set out by the SPU. Excise Duties are forecast to raise €6 billion
in tax receipts in 2021 (€195 million higher than the SPU), Stamp duties are estimated to collect €1.725 billion
(€200 million ahead of profile), Motor Tax €925 million (€5 million higher than SPU), Customs €470 million
(€60 million ahead of profile), Capital Gains Tax €1.1 billion (€200 million ahead) and Capital Acquisitions Tax
€540 million (€50 million ahead of profile).
GDP
Post-Budget 2022 PBO Commentary
Figure 17: Outperformance in Tax Revenues
Budget 2022
SES
SPU
2020 Actual
52 54 56 58 60 62 64 66 68
€ billions
Sources: Budget 2022 Economic and Fiscal Outlook (Department of Finance), Summer Economic Statement 2021
(Department of Finance), Stability Programme Update 2021 (Department of Finance), Databank (Department of Finance).Post-Budget 2022 PBO Commentary
Budget 2022 Changes
In 2022, the Irish Exchequer is expected to collect a record €70.2 billion in tax receipts, an increase of €4.1 billion or
6.2% compared to the €66.1 billion in tax revenue estimated to be collected in 2021. Budget 2022 contains revenue
raising measures of approximately €340 million for 2022 and revenue reducing measures of approximately €795 million
22 for 2022. This results in a net revenue loss of €455 million for the Irish Exchequer in 2022.
The largest reduction in revenue was due to changes to personal income tax while the largest revenue gain was due
to an increase in carbon taxes.
A broad and resilient tax base is important to support sustainable increases in expenditure to meet societal
challenges in areas such as the infrastructural deficit, housing, healthcare, climate change and demographic
changes (an aging population).
Revenue Reducing Measures
There were some measures announced in Budget 2022 that will narrow the tax base or reduce Exchequer revenue, such as:
Income tax reduction measures (estimated to reduce revenue by €520 million in 2022 and €597 million
in a full year) which include:
an increase of €1,500 in the standard rate band for all earners from €35,300 to €36,800 for single
individuals and from €44,300 to €45,800 for married couples or civil partners with one income;
an increase in the Personal Tax Credit, the Employee Tax Credit and the Earned Income Credit from
€1,650 to €1,700.
There were also changes to the Universal Social Change (USC) with an increase in the 2% or second USC
band from €20,687 to €21,295.
Post-Budget 2022 PBO Commentary
The Help to Buy (HTB) Scheme was extended until the end of 2022. The Minister for Finance announced in his
speech that there will be a full review of the scheme which will be carried out in 2022. The PBO notes that the
estimated full cost of the scheme for 2022 as outlined in Budget 2022 ‘is estimated to be in the region of €175
million of which €92 million is in the tax base’ which leads to a 2022 additional cost of €83 million. The PBO
would welcome additional information on this calculation. In a previous publication the PBO identified some
issues with the design of the scheme (e.g. scheme benefiting households at the higher end of the income
distribution and that already had a deposit).23 The PBO notes that in a context of limited housing supply,
schemes fuelling demand could further lower affordability by increasing prices.
There will be an extension of the reduced VAT rate from 13.5% to 9% for the tourism and hospitality sector until
1st September 2022. The PBO would welcome clarity on the potential cost to the exchequer of such a measure.
An increase in the weekly threshold for the higher rate of employer’s PRSI from €398 to €410 following
a recommendation from the Low Pay Commission.
23 Parliamentary Budget Office – An overview and analysis of the Help to Buy Scheme – Publication 51 of 2019Post-Budget 2022 PBO Commentary
Revenue Raising Measures
The PBO notes that Budget 2022 included some measures which will raise revenue such as:
An increase in the rate of Carbon Tax by €7.50 from €33.50 to €41 per of tonne of carbon dioxide emitted
(which is estimated to raise an additional €109 million for the exchequer in 2022).
Changes to Vehicle Registration Tax (VRT) which will raise an additional €82 million in revenue in 2022. 23
An extension of the bank levy (which was due to expire end of 2021) to the end of 2022 which will raise
€87 million for the Exchequer. It should be noted that this figure is down on the €150 million raised in 2021
as the levy will not apply to two financial institutions (KBC and Ulster Bank) who have announced plans
to exit the Irish market.
An increase of 50c on a pack of 20 cigarettes with a pro-rata increase on other tobacco products which
is expected to raise an additional €56 million in 2022 for the Exchequer.
The full range of measures can be seen in the table below:
Post-Budget 2022 PBO CommentaryPost-Budget 2022 PBO Commentary
Table 1: Taxation and revenue measures summary
Measure 2022 yield (+)/cost (-) Full year yield (+)/cost
(-)
Income tax changes -€520m -€597m
24 Naval personnel tax credit -€0.5m -€0.5m
USC changes -€22m -€26m
Work from home deductions -€10m -€11m
Taxation of international flight crew -€10m -€12m
Digital gaming tax relief -€2m -€6m
Start-up tax relief -€5.7m -€10m
Employment Investment Incentive (EII) -€10m -€10m
Stock relief -€8m -€8m
Young Trained Farmer (Stamp Duty) relief -€15m -€15m
Help to Buy (HTB) scheme -€175m* -€175m*
Pre-letting expenses for landlords -€3m -€3m
Micro-generation of electricity -€1m -€1m
Accelerated Capital Allowance scheme -€2m €nil
Employer’s PRSI -€10.6 -€12.5
Carbon Tax +€109m +€148m
Vehicle Registration Tax (VRT) +€82m +€82m
VAT Farmers Flat Rate +€5.8m +€7m
Post-Budget 2022 PBO Commentary
Tobacco Products +€56m +€56m
Bank Levy Extension +€87m +€87m
Revenue Reducing Measures -€794.8m -€887m
Revenue Increasing Measures +€339.8m +€380m
Total -€455m -€507m
*Note: The Department of Finance estimates that the full cost of the HTB scheme for 2022 will be €175 million of which
€92 million the Department says is in the tax base. The Department adjusts the cost to be €83 million however the PBO
is using the full €175 million figure as the PBO would welcome additional information/clarity on the €92 million built
into the tax base.
Source: Budget 2022 Tax Policy Changes (Department of Finance)Post-Budget 2022 PBO Commentary
Year-on-year changes
Income Tax is expected to raise €26 billion in 2021 and will once again be the largest tax stream for the Irish exchequer.
This is up from the €22.7 billion collected in 2020, a year-on-year increase of €3.3 billion or 14.6% which has largely
been driven by the recovery in the labour market both in terms of increased employment and higher wages.
25
VAT is forecast to raise €15.4 billion in tax receipts in 2021, up from €12.4 billion in 2010 and will once again be the
second largest tax head for the exchequer. This is equivalent to a year-on-year increase of €3 billion or 24%, reflecting
the strong rebound in consumption and economic activity due in part to the unwinding of public health restrictions and
the pent-up demand built up by excess savings during the pandemic.
Tax receipts from excise duties are expected to raise €6 billion in 2021, up from the €5.4 billion collected in 2020.
This represents an annual increase of €585 million or 10.7%.
Corporation tax forecasting and OECD BEPS reforms
The net receipts for corporation tax is projected to be €13.9 billion in 2021, amounting to 21 percent of exchequer tax
receipts. This would be its highest share of total tax receipts and is expected to be the third largest revenue stream for
the exchequer, after Income Tax and Value-Added Tax (VAT). In 2020, corporation tax amounted to €11.8 billion. In 2021
there was a year-on-year increase of €2.1 billion or 17.4%.
The growth in corporation tax receipts in the 2010s is very significant, with the average growth rate from 2016-2019 at
10.1%24. In Budget 2022, growth is projected to continue by 2025, although CT level is broadly constant over 2021-2023.
Corporation tax revenue amounted to 10 percent of exchequer tax receipts in 2010 (€3.9 billion) and this grew to 21
percent of exchequer tax receipts in 2020 (€11.8 billion). There is a concern by the Fiscal Council and the Parliamentary
Budget Office about the State becoming too reliant on this highly volatile tax, mirroring the experience of relying on
stamp duty and transaction-based taxes in the Celtic tiger era.25
Post-Budget 2022 PBO Commentary
A key issue with corporation tax revenue in Ireland is the overreliance on a small number of firms. In 2020, the top
10 firms contributed 51% of net corporation tax receipts (around €5.9 billion) and amounted to approximately 10%
of exchequer tax receipts in 2020.
24 ESRI (2021) Quarterly Economic Commentary
25 Fiscal Council (2021) Fiscal Assessment Report May 2021: Looking beyond Covid-19 & PBO (2019) An Overview of the Corporation Tax Base in IrelandPost-Budget 2022 PBO Commentary
Figure 18: Corporation Tax Budgetary projections 2020-2025: SPU 2021 versus Budget 2022
€16,000m
€15,000m
€14,000m
26 €13,000m
€12,000m
€11,000m
€10,000m
€9,000m
€8,000m
2020 2021f 2022f 2023f 2024f 2025f
SPU 2021 Budget 2022
Sources: Stability Programme Update 2021 (Department of Finance); Budget 2022 – Economic and Fiscal Outlook
(Department of Finance).
Budget 2022 estimates of corporation tax revenue out to 2025 projects an increase of around €2 billion each year
compared to the SPU. Forecasts for CT were revised upwards despite the already substantial increase in corporation tax
receipts in 2020 and the OECD BEPS reforms that Ireland has recently agreed to. Base Erosion and Profit Shifting (BEPS)
activities are efforts by a multi-national company to erode taxable income and ultimately reducing tax liability. BEPS is
also the acronym of the OECD/G20 Inclusive Framework to address this tax avoidance activity. Ireland, along with the
vast majority of economies (136 countries and jurisdictions), have signed up to an OECD Statement outlining a new
framework for international corporation tax competition. The OECD BEPS would reduce the influence of corporation
taxes on investment decisions and multi-national companies could locate their investments and operations to
Post-Budget 2022 PBO Commentary
countries based on non-corporation tax factors.
The OECD BEPS reforms consist of two pillars. The first pillar reallocates a portion of profits to where sales are located,
instead of where the company is based. This could make Ireland a less attractive location for multi-national companies.
The second pillar concerns a global minimum corporation tax rate of 15% for companies with revenue over €750 million.
This has potential positive and negative effects. The higher rate could lead to an increase in corporation tax revenue.
However, the higher rate could also reduce the competitive tax advantage of Ireland to the multi-national companies.
As a result of OECD BEPS reforms, there is a projection of a reduction of annual corporation tax receipts by €2 billion
by 2025. In Budget 2022’s words, “revenue foregone – at €2 billion relative to baseline by 2025; the revenue impact is
phased in from 2023”. This is a very uncertain estimate. Given the potential impact of BEPS, Budget 2022 forecasts for
corporation tax revenue in 2024-2025 may be too optimistic. It should be considered that the SPU 2021 forecast modest
growth in corporation tax, possibly due to the BEPS reforms.
Analysis of corporation tax receipts by the Central Bank of Ireland and the Irish Fiscal Advisory Council would indicate
caution about future growth. The Central Bank notes that corporation tax growth has driven almost half of all tax growth
since 2014 and corporation tax revenue faces significant risks in the near future. A scenario analysis presented by theYou can also read
