Central Bank Quarterly Bulletin 3 2020

Guest post by Stephen Byrne, Central Bank of Ireland

Today the Bank published its third Quarterly Bulletin of the year. The report contains a detailed overview of developments in the economy since the publication of last Bulletin in early April as well as our latest macroeconomic forecasts out to 2022.

Given the scale of uncertainty surrounding the economic impact of Covid-19, two different scenarios for the economic outlook are outlined in the Bulletin (see featured image above).

In the “baseline” scenario, the economy reopens in line with the Government’s phased plan, allowing for a rebound in economic activity in the second half of the year. Some containment measures would remain in place meaning that activity would be constrained in some sectors for a longer period. Beyond the initial rebound, recovery is expected to be gradual, in line with a slow unwinding of precautionary behaviour as the effects of the shock on consumers and businesses lingers. The unemployment rate is set to decline from its second quarter peak of about 25 per cent as the year progresses and is projected be around half that level by the end of this year, before averaging just over 9 per cent next year and 7 per cent in 2022.

The baseline scenario sees output recovering to its pre-crisis level by 2022. However, the level of activity will be significantly below where it would have been had the economy grown in line with expectations before the outbreak of the pandemic.

In the “severe” scenario, the strict lockdown period is assumed to have a more damaging impact on economic activity and is not successful in effectively containing the virus. Stringent containment measures would remain in place, or would be re-instated, albeit not as severe as before, based on an assumption that there would be a resurgence of the virus at some point over the next year. In this scenario, there is a subdued economic recovery with a larger permanent loss of output. Unemployment remains higher for longer in this scenario and would average just below 17 per cent in 2020, while consumer spending is projected to fall by around 14 per cent and GDP by over 13 per cent this year. In this scenario, the projected recovery in growth in 2021 and 2022 would not offset the loss of output this year, leaving the level of GDP in 2022 about 5 per cent below its pre-crisis level.

Both of these scenarios assume that a Free trade agreement in goods between the UK and the EU, with no tariffs and quotas on goods, takes effect in January 2021. If such an agreement is not reached, then the EU and the UK would move to trading on WTO terms from January 2021. Box D of the Bulletin discusses the implications of such an outcome.

The bulletin also contains analysis of the impact of Covid-19 on debt dynamics and sustainability, as well as a detailed examination of the regional labour market impacts of the pandemic.

Finally, an accompanying signed article explores alternative long-term recovery paths for the economy and assesses the impact of fiscal and monetary policy supports. The Article considers how hysteresis – or scarring ­­– effects could influence the pace and nature of the recovery. The paper shows that, as a highly open economy, Ireland benefits from the positive effects of monetary and fiscal policy measures implemented abroad. The assessment of the combined effects of domestic and international policy supports indicates that the actions will help to meaningfully reduce the scale of the output loss in Ireland from the pandemic.

How (Not) To Do Public Policy: Water Charges and Local Property Tax

Jim O’Leary has an op-ed about the Local Property Tax  in today’s Irish Times, based on his recent report, How (Not) To Do Public Policy: Water Charges and Local Property Tax, published by the Whitaker Institute at NUI Galway. The report was launched at a conference last month at NUI Galway featuring senior policymakers, public servants, academics and other experts who evaluated the strengths and weaknesses of the policy-making process in Ireland with a view to suggesting how the quality of policy-making might be improved. Highlights from that conference, including videos of Jim’s presentation and Robert Watt’s keynote speech as well as audio of the panel sessions can be found here on the Whitaker Institute website.

How (Not) To Do Public Policy

Conference and launch of new report on water charges and the local property tax

1:30pm, Thursday, 13 September 2018
Aula Maxima, The Quadrangle, NUI Galway

Why do some public policy measures succeed while others fail? Why, for example, has the Local Property Tax been a policy success, while the attempt to introduce water charges was a policy disaster? What can we learn from successful and failed policies about the policy-making process in Ireland and how to make that process more effective?

This conference will gather senior policymakers, public servants, academics, and other experts to evaluate the strengths and weaknesses of the policy-making process in Ireland with a view to suggesting how the quality of policy-making might be improved. Although much analytical attention has been paid to the effects of public policies in Ireland and to the macroeconomic context in which they are set, there has been very little analysis of the policy-making process: How policies are conceived, designed, implemented, communicated, and reviewed. This conference is an attempt to address this gap. View the conference programme here.

The conference will feature the launch of a new Whitaker Institute report by economist Jim O’Leary on water charges and the local property tax. This report, meticulously researched based on exceptional access to senior policymakers, looks back forensically at these two recent policy initiatives and explores what it was about the policy-making process in each case that contributed to success or failure.

This conference is aimed at a general audience and will appeal to anyone with an interest in how public policy is made in Ireland. The event is free and open to the public, however those who wish to attend must pre-register at: https://www.eventbrite.ie/e/how-not-to-do-public-policy-tickets-48552806752

Revenue Annual Report 2017 and New Research

This morning Revenue published our Annual Report for 2017. The report contains lots of information on Revenue’s activities and outputs last year that contributed to the collection of €50.8 billion in net receipts for the Exchequer, as well as delivering on service to support compliance, the implementation of customs controls and facilitation of trade.

Also published today are a series of research papers that may interest readers of this blog:

Updated Corporation Tax research profiles tax payments received in 2017 as well as analysis of 2016 tax returns. This includes significant new analysis of multinational companies in Ireland.

An analysis of Income Dynamics and Mobility based on Revenue micro data. This examines the distribution of incomes by decile and percentile as well as tracking mobility of income earners over time.

Profiles of Excise Duty and Capital Taxes receipts. Excise, Capital Acquisitions Tax , Stamp Duty, Capital Gains Tax and Local Property Tax cover wide ranging activities, transactions and products. The profiles document these in detail and show changes in core components in recent years.  For the first time, information on capital taxes are combined together with location and earnings data to present new perspectives on the taxes.

Revenue’s latest customer survey, of small to medium sized enterprises in 2017, is Revenue’s fourth SME survey. Responses show that customer satisfaction with Revenue service remains high across a range of headings. The survey also includes a behavioural experiment to test the impact of personalisation on response rates.

Also published is the annual illegal tobacco survey results for 2017 and the first quarterly Local Property Tax statistics for 2018.

 

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?