Flaws in the Fiscal Council’s comparison of Ireland to other small open economies

Responding to the Irish Fiscal Council’s pre-budget statement, Labour Finance and Public Expenditure Spokesperson, Joan Burton TD, noted two important flaws in the Fiscal Council’s comparison of Ireland to other small open economies.

Deputy Burton said: “The Fiscal Council has an important role to play in providing independent advice to Government to help prevent the kind of mistakes that were made in the public finances prior to the 2008 crash.

“However, the call to suddenly balance the books in Ireland overlooks important differences with other small open economies in Europe that we might want to emulate, including Denmark and the Netherlands. The Fiscal Council needs to be challenged on these omissions.

“The Fiscal Council is arguing for Ireland to run a surplus in Budget 2019, reinforcing a similar recent statement from the Governor of the Central Bank. These institutions are correct to say that Ireland’s economy is vulnerable to a number of likely shocks in the coming years, including from Brexit, global trade and changes to international approaches to corporation tax.

“The first problem with the Fiscal Council argument is that Ireland does not have the same level of infrastructure as these countries, including social infrastructure like well-established systems of supplying affordable municipal housing. Ireland needs to invest more in its future capacity to continue to develop its economy, but this has to be based on investing in social infrastructure like healthcare and housing as well as economic infrastructure.

“The root of Ireland’s difficulties is that the EU rules are strangling countries’ ability to make the necessary investments in infrastructure and housing, which needs to change for all of the EU but is particularly a problem for Ireland where we need a greater level of capital spending than is permitted by those rules.

“The second major flaw in the Fiscal Council’s analysis is that Ireland’s overall tax take is among the lowest in the world as a percentage of GDP, at 23%, according to the OECD (2016).

“Even if Ireland’s tax take was seen as a percentage of GNI*, which is a problematic assumption, it would still be low at 33.4% of GNI*. This is roughly the same as the UK (33.2% of GDP), and significantly below the tax take of Austria (42.7%), Denmark (49.9%) or the Netherlands (39.9%), which are the other small European countries with open economies.

“Ireland cannot run a budget surplus in 2019 in the same way as Denmark or the Netherlands because we do not have a sufficient tax take.

“It is important to recall that Ireland’s tax revenue fell by over 30% in one year, which was unprecedented for any developed economy. With our over-reliance on foreign investment and a failure to ensure our tax system is robust and resilient, Ireland risks another crash if the global economy experiences another downturn.

“The issue of taxation is extremely political in Ireland compared to other countries, which is why I have called for the establishment of an independent standing Commission on Taxation to look at the long-term sustainability of Ireland’s tax system. This needs to be done in a non-partisan way to ensure that Ireland’s economy and society is not facing another major crisis in a few years’ time.”