Ireland’s public finances beyond the short-term: 10 facts
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From: Department of Finance
- Published on: 10 May 2023
- Last updated on: 10 May 2023
In headline terms, the State’s finances appear to be in good shape. However, underlying developments such as vulnerabilities to corporation and income tax receipts on the revenue side, and the costs associated with an ageing population and the climate and digital transitions on the expenditure side flatter this headline position. Ensuring that the public finances are kept on a sustainable footing in the long-term requires that close attention be paid to these developments, among others.
Fact #1: corporate tax revenue has increased by c. €20 billion in a decade
In 2012, corporation tax receipts amounted to €4 billion. Last year, the income stream from this source amounted to €22½ billion, an increase of nearly €20 billion in just a decade.
Direct tax receipts from the corporate sector accounted for €1 in €4 of all tax paid last year; moreover, this is now the second largest income stream for the State.
Fact #2: corporate tax revenue has doubled since before the pandemic
In the year preceding the pandemic, corporate tax receipts amounted to €11 billion; at €22½ billion last year, receipts have doubled in just three years, an unprecedented rate of increase.
Fact #3: corporation tax receipts are highly concentrated
Receipts from corporation tax are highly concentrated, with just 10 large companies accounting for 57 per cent of all corporate tax paid last year. To put it another way, over €1 in €7 of all tax receipts last year were sourced from these large payers.
Fact #4: income tax receipts are also concentrated
The income tax base is also relatively narrow. Around half of all income tax receipts from the corporate sector are sourced from foreign-owned multinational corporations. Firm- or sector-specific shocks, therefore, could contaminate income as well as corporate tax revenue streams. Income tax receipts are also concentrated among payers with the top 10 per cent of earners paying approximately 60 per cent of total income tax.
Fact #5: the outstanding amount of public debt is relatively high
At €225 billion, the stock of public debt is relatively high in Ireland. While the interest burden has fallen in recent years, borrowing costs have been on a rising trajectory for over a year, and this will gradually feed into higher debt service costs.
Fact #6: the Irish population is ageing
Ireland’s demographic window is closing: with people living longer and fewer babies being born, the Irish population is set to age rapidly in the coming decades. There are currently c. 4 people of working age for each person of retirement age; by 2060 this ratio is projected to fall to just 2.
Fact #7: an ageing population will have implications for the public finances
Analysis by the Department of Finance suggests that age-related expenditure will be €7-8 billion higher by the end of this decade alone, relative to the beginning of the decade. Thereafter, these costs are set to increase exponentially, by 2070, ageing-related costs will account for 31½ per cent of GNI*, an increase of 10.1 percentage points on the 2019 levels. The higher expenditure on healthcare, pensions and long-term care will have to be met by a relatively smaller working age cohort.
Fact #8: maintaining the state pension age at its current number will be costly
The largest component of the projected increase in ageing-related costs is pensions. The estimated cumulative cost of keeping the State Pension age at 66 could be around €50 billion by 2070.
Fact #9: the climate and digital transitions will also impact the public finances
Financing the climate and digital transitions will be costly: the structural shift to Electric Vehicles will adversely have an impact on Vehicle Registrations Tax, for instance, while up-skilling and re-skilling the population to harness the benefits of digitisation, automation, artificial intelligence, etc. will involve additional expenditure in the years ahead.
Fact #10: Irish public savings vehicles have been established in the past
In Ireland, the National Pensions Reserve Fund was established to part-fund the pension liabilities of an ageing population. Its objective was to meet as much as possible of the fiscal costs associated with the provision of social welfare and public pensions over the period 2025-2055. Between 2001 and 2009, the National Pensions Reserve Fund achieved an annualised return of 2.6 per cent per annum, delivering 7 out of 9 years of positive returns.
During the joint banking / sovereign debt crisis of 2008-2012 the National Pensions Reserve Fund was partly liquidated and the residual was re-purposed as the Irish Strategic Investment Fund in 2014. In 2019 the National Reserve Fund was established as a rainy day fund which could be deployed to support economic activity in the event of a severe shock to the economy. Over 2022 and 2023, the National Reserve Fund was capitalised with €6 billion of windfall corporation tax receipts.
