Author: Seamus Coffey

Latest Assessment Report from IFAC

The Irish Fiscal Advisory Council has published its latest Fiscal Assessment Report.  The report and some additional resources are available here.

Accompanying the report is a working paper that looks at how a counter-cyclical “rainy day fund” could be incorporated in the framework of the Stability and Growth Pack.  Last week, IFAC published its assessment of compliance with the Domestic Budgetary Rule in 2017 as well as an update of its Standstill Scenario which estimates of the cost of maintaining today’s level of public services and benefits in real terms over the medium term.

A bullet-point summary of the latest FAR:

  • A rapid cyclical recovery has taken place since at least 2014 and this is continuing at a strong pace.
  • Ireland’s debt burden is still among the highest in the OECD.
  • Negative shocks will inevitably occur in future years and there are clear downside risks over the medium term, namely those associated with Brexit, US trade policy and the international tax environment.
  • Improvements on the budgetary front have stalled since 2015 despite the strong cyclical recovery taking place – one that is reinforced by a number of favourable tailwinds.
  • Any unexpected increases in tax revenues or lower interest costs should not be used to fund budgetary measures.
  • The Council welcomes the Department’s publication of alternative estimates of the output gap.
  • The Medium Term Objective (MTO) of a structural deficit of no less than 0.5 per cent of GDP was reached in 2017.
  • The Council sees the fiscal rules as a minimum standard for sustainability and continues to recommend that the Government commit to adhering to the Expenditure Benchmark even after the MTO is achieved.

And on Budget 2019 in particular:

  • The Government should at least stick to existing budget plans for 2019 as there is no case for additional fiscal stimulus beyond existing plans as set out in the 2018 Stability Programme Update.
  • Estimates of the medium-term potential growth rate of the economy and expectations of economy-wide inflation for next year imply an upper limit for increasing the adjusted measure of government expenditure of 4.5%.
  • In nominal terms this translates into spending increases or tax cuts of up to €3½ billion (“gross fiscal space”) as the starting point for Budget 2019.
  • Previously announced measures – including sharp increases in public investment – mean that the Government’s scope for new initiatives in Budget 2019 will be limited.
  • If additional priorities are to be addressed, these should be funded by additional tax increases or through re-allocations of existing spending.
  • Improving the budget balance by more than planned would be desirable, especially given current favourable times, possible overheating in the near-term and visible downside risks over the medium term.

New publication from the CSO on productivity in Ireland

The CSO have a new publication, which it is intended to update annually, on productivity in Ireland.  It is available here.

The analysis assesses the contribution of labour and capital to growth in Ireland and splits the economy into an MNE-dominated sector and a domestic and other sector.  A breakdown using the standard NACE classifications is also provided.  The first publication covers the period from 2000 to 2016 but the analysis is undertaken for a number of sub-periods, most notably 2000 to 2014, which exclude the dramatic shifts we have seen since 2015.

Here is the summary but the entire publication is well worth a look:

This publication has presented new CSO results for productivity in the Irish economy since 2000. Some key aspects of this publication are set out below.

Irish labour productivity growth averaged 4.5 percent in the period to 2016, significantly for the period ending 2014 the equivalent growth rate is 3.4 percent. This compares with an EU average of 1.8 percent for the entire period to 2016. The contribution of the Foreign sector to labour productivity growth averaged 10.9 percent over the period to 2016 and averaged 6.2 percent to 2014. For the Domestic and Other sectors, the result to 2016 was 2.5 percent to 2016 and 2.4 percent to 2014. This clearly illustrates that the impact from the globalisation events of 2015 are concentrated in the Foreign sector as there is little change in the results for the Domestic and Other sector for the two periods.

Multi-factor productivity (MFP) has played a small part in explaining Ireland’s economic growth over the entire period 2000-2016. However, when the period 2000 -2014 is examined, i.e. excluding the effects of 2015, the picture for multi-factor productivity in the Irish economy improves and this is clearly illustrated in Figure 5.6 and 5.7. Growth in MFP was higher for the Foreign sector than the Domestic and Other sector up to 2014. However, the negative result for MFP in the Foreign sector in 2015 and in the overall economy over the full period is due to the impact of the globalisation events of 2015 on capital services where no corresponding change in labour input occurred. A major aspect of Ireland’s growth, and therefore its productivity story over the period, is the growth in capital.

Ireland’s capital stock per worker has increased from €150,000 to €378,000 per worker between 2000 and 2016, an increase of 152 percent. Capital stock per worker for the Foreign sector increased by an average annual growth rate of 6.9 percent to 2014. When the period is extended to 2016, the growth rate increases substantially to almost 32 percent. For the Domestic and Other sector, the growth in capital stock per worker is around 3.5 percent for both the periods to 2014 and for the entire period to 2016. The EU average annual growth in capital stocks per worker from 2000 to 2016 was 0.6 percent. The rate of increase in capital stocks in Ireland for both the Foreign sector and the Domestic and Other sector was higher than for any country in the EU for which data are available.

As this is the first productivity publication by CSO the results are considered experimental. There is considerable scope for extending the analysis presented in this publication to more detailed presentation by economic sector or to more detailed analysis of labour quality, i.e. gender, education, employment etc and their impacts on productivity. We look forward to a full engagement with our stakeholders to assist in setting priorities for future work in this area.

 

The taxation of profits from intangible assets and Ireland’s contribution to the EU Budget

In last weekend’s Sunday Independent Richard Curran had a piece the start of which looked at a measure passed via Financial Resolution No. 3 on the night of the Budget speech. He says:

Multinationals make very real profits from charging for the use of their IP. In 2015, the trading profit made by multinationals in Ireland on their IP shot up by €26bn. This was completely offset by capital allowances they received - basically reducing their taxable profit on that to close to zero.

To put it in perspective if we had allowed just 80pc of that to be set against capital allowances, we could have taxed 20pc of it at 12.5pc. It could have yielded around €650m in tax.

The measure is linked to the recently published Review of Ireland’s Corporation Tax Code and Richard Curran’s piece throws light on most of the key issues, except one: the link to Ireland’s contribution to the EU budget.  This is referenced in paragraph 9.3.11 of the review:

Figures from the Revenue Commissioners and Tancred (2017) show that there was a €26 billion increase in intangible-asset related gross trading profits in 2015. This was offset by an increase in the amount of capital allowances for intangible assets of a similar scale. These gross trading profits are included in Ireland’s Gross National Income but the use of capital allowances results in a much smaller amount being included in the taxable income base for Ireland’s Corporation Tax. Given Ireland’s contribution to the EU Budget is calculated by reference to Gross National Income, this increase in profits has an impact.

Assessing this impact was beyond the scope of the review but is something which the seven-page note linked below attempts to address.  With lots of moving parts precision is difficult to achieve but the broad elements of the issue should hopefully stand out.

A note on intangibles, the taxation of their profits, and Ireland’s contribution to the EU budget

Update: Here is a bullet-point summary

  • In 2015 intangible-asset-related gross trading profits of multinationals operating in Ireland increased by €26 billion.
  • In the same year claims for capital allowances related to expenditure on intangible assets increased by €26 billion.
  • No Corporation Tax is due on the gross profits offset by capital allowances
  • Using estimates from the Department of Finance implies that these figures have risen to around €35 billion for 2017.
  • These untaxed profits are included in Ireland’s Gross National Income which adds about €200 million to the country’s contribution to the EU budget.
  • A cap on the amount of capital allowances that can be used in a single year is to be introduced for new claims for capital allowances on intangibles.
  • Based on patterns for the past two years the Department of Finance forecast that this will result in €150 million of additional Corporation Tax being paid in 2018.
  • The Revenue Commissioners figures for 2015 and the Department of Finances estimates of the impact of recent onshoring imply that  intangible-asset-related gross trading profits are expected to be around €40 billion in 2018 (with a further €36 million added to the EU contribution).
  • If the cap applied to all claims, existing and new, then the additional Corporation Tax to be collected in 2018 could be up to €1 billion using the 2015 figure published by Revenue and estimates from that time used by Finance.
  • If companies who are expected to move IP here in future years are happy to pay the tax now why doesn’t the same apply for companies who already have IP here?

Rewriting the rules

From an Irish perspective the most significant announcement made yesterday by Commissioner Vestager was in relation to Amazon not Apple.  The Commission announced that Luxembourg had granted €250 million of illegal sate aid to Amazon.  The structure used by Amazon in Luxembourg is close to a replica of that used by US companies in Ireland.  It is a double-luxembourgish.  Here is the Commission’s description of the Amazon structure:

Continue reading “Rewriting the rules”

That 26% growth rate – from startled earwigs to stars in our eyes

Last year we were scrambling around in response to the impact of the 26.3 per cent real GDP growth rate that was the headline from the 2015 National Income and Expenditure Accounts (NIE).  So where do we stand one year on? Long post, with too much mind-numbing detail, below the fold.

Continue reading “That 26% growth rate – from startled earwigs to stars in our eyes”