Proposal on Corporation Tax and Rainy Day Fund lack economic coherence

18 June 2018

In advance of the publication of the Summer Economic Statement, and responding to the suggestion by the Minister for Finance, Pascal Donohoe, that a portion of Corporation Tax revenue should be allocated to the Government’s proposed “rainy day fund”, Labour Finance spokesperson and former Tánaiste, Joan Burton TD, criticised the lack of coherence in the proposal.

Deputy Burton said:

“The Minister for Finance is trying to create something that does not exist in Irish law. There is no distinction made between money coming from income tax, VAT or Corporation Tax. All tax revenue goes into the Central Fund. The idea that ‘excess’ Corporation Tax should go into a ‘rainy day fund’ is neither sensible nor desirable.

“Firstly, the notion of a rainy day fund has not been thought through. State finances do not work like those of a company or a household.

“The rainy day money has to go somewhere. Such a fund would be of no benefit to the real economy if it ends up invested abroad. Nor is it desirable for the Irish taxpayers’ money to be gambled on the stock exchange. It should therefore go into productive investment, and that means State-led capital and current investment in education, housing and other essential public services, now that it is at last financially possible to do so. Such spending would give us a social dividend as well as an economic benefit.

“A normal household can save money because it is small relative to the size of the economy. But if the State saves (by putting money abroad) that can shrink the whole economy to a significant degree, and the opportunity is lost to make the essential investment, like in education and housing, that will put the economy in a better place in future.

“With our growing population, we need to spend more in health and education, not just to provide the same level of service to ever-more people, but to improve results and to give relief to our most disadvantaged communities now that we can afford to do so.

“Ireland already has billions invested in the Ireland Strategic Investment Fund (ISIF), which provides finance for economic development and job creation here in Ireland. This fund is far from being fully utilised, and it makes no sense to set up a new fund. The present need in Ireland is clearly for State-led social investment.

“Labour’s record on painstakingly rebuilding the public finances is sound. We now must challenge conservative thinking that is so risk-averse that it promotes a less efficient and ineffective use of public finances. We need to have State-led investment in long-term productive capacity now, and that includes investment in education and healthcare, without which workers in the economy cannot function. Like the ESRI, Labour’s economic analysis is that there is no scope for tax cuts in the next Budget.

“Fiscal discipline requires that the Government takes a whole-of-government approach to agree where money needs to be strategically invested. The politics of that are tricky, as every minister will want to spend more, but the test of firm leadership by the Taoiseach and the Minister for Finance and Public Expenditure is not to spend less but to spend wisely.

“The second problem with the Corporation Tax suggestion is that it confuses two quite different issues, which are the robustness of our tax base and the issue of saving not spending public money.

“If there is fluctuation in the money raised from Corporation Tax, then we need to take action to make our tax base more secure. Measures to do that could include implementing an effective minimum effective rate of Corporation Tax. We could also look at the overall composition of tax revenue to see whether it would be resilient if there was a sudden economic downturn, as could be caused by a disorderly Brexit.

“But making decisions about whether or not to invest public money should be based on solid economic arguments about whether we’d get a better return on investment, as a society, from investing in schools, affordable housing and transport, or whether that money should be invested who knows where in the global economy. When you look at it this way, it is obvious from Labour’s perspective that we will get better value for money by careful State-led investment in the areas that will give the greatest benefit to society and to the economy combined.

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