The Central Bank's hard-landing scenario: corporate tax crashes, budget deficit balloons to €18bn

Irish Times

6 hours ago

For obvious reasons, officials in Ireland can't use the term 'soft landing'.
It was trotted out so regularly, so erroneously in the late 2000s when the economy was hurtling towards the hardest of hard landings that it has become synonymous with the opposite.
If the
Central Bank
told us the Irish economy was in for a 'soft landing' from the current US tariff debacle, people would panic.
Perhaps in reaction to the misplaced optimism of the
Celtic Tiger
era, we now seem to have an inherent bias towards highlighting negative scenarios.
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US tariffs could punch €18bn hole in public finances, Central Bank warns
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We were certainly prepared for a bigger assault from Brexit than the one we actually got.
Some call it 'catastrophising', but regulators should take a sober view on things.
In an article published alongside its latest quarterly bulletin, the Central Bank lays out three possible scenarios for how US tariffs and greater US protectionism might impact the economy here.
In its baseline scenario, which involves 20 per cent
tariffs
on
European Union
goods going into the US from the third quarter of this year, with pharmaceuticals and semiconductors exempt, the economy grows by 2 per cent this year, in terms of modified domestic demand, and 2.1 per cent on average in 2026 and 2027, while the State continues to run a budget surplus out to 2030.
Even if it won't say it, this is the regulator's 'soft landing' scenario.
In a more adverse scenario with pharmaceuticals and semiconductors getting hit by 20 per cent tariffs and with the EU retaliating with 20 per cent tariffs of its own, growth is slower and the budget surplus shrinks to less than 1 per cent.
But what grabbed the headlines was the Central Bank 'extreme scenario' which involves the State losing the entire windfall element of its
corporate tax
base, which is due to peak at €17 billion in 2026, alongside a 20 per cent reduction in multinational investment 'and a corresponding loss of export market share'.
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This scenario would see the Government's healthy budget surplus – it was €8.9 billion last year – flip to a budget deficit of more than 4 per cent of national income by 2030, equivalent to €17.7 billion.
While there are lots of caveats – the scenario assumes the Government takes no corrective action and continues to make contributions to the two long-term savings funds – such an outcome would pitch us back into another period of austerity.
It also highlights how much the State's coffers have become intertwined with the financial fortunes of a small number of US multinationals.
'This could be considered a somewhat extreme scenario as it incorporates a loss of all excess CT [corporate tax] by 2030 along with weaker economic activity, but it is illustrative of a key vulnerability for Ireland relating to the future path of the foreign-owned capital stock,' it said.
Central Bank director of economics and statistics Robert Kelly denied he was painting too bleak a picture, saying the bank's worst-case scenario did not envisage the possibility of a big multinational firm leaving the jurisdiction because of tariffs or changes to US tax law, which has been the fear since the corporate tax boom started more than a decade ago.
The nightmare scenario for Ireland would be for an Apple or an Intel to up sticks and leave.
Despite the threat hanging over Ireland's economic model, there are several reasons to believe that corporate tax receipts, which hit a record €28 billion last year (excluding the Apple tax money), will continue to increase in the medium term.
For one, the biggest corporate taxpayers here are in the tech and pharmaceutical sectors, both at present exempt from US tariffs.
The
Irish Fiscal Advisory Council
(IFAC) also expects receipts from the business tax to rise by about €5 billion from 2026 onwards as additional revenue from the new minimum tax rate of 15 per cent over and above the State's headline rate of 12.5 per cent flows into the Exchequer.
Big multinationals with a turnover above €750 million have been liable to pay the higher rate since 2024, but are not due to make their initial payments under the new rate until the middle of next year. This is expected to boost tax receipts here by an additional €3 billion next year and €2 billion in 2027.
Despite the US signalling its intention to withdraw from the
Organisation for Economic Co-operation and Development (OECD)
-brokered deal to establish a minimum global rate, tax authorities here and elsewhere are pushing ahead with it.
Several big taxpayers here have been availing of generous tax-cutting capital allowances which are due to run out, meaning they will be liable to pay more tax – another factor likely to drive receipts.
Some of the frothier predictions suggest corporate tax receipts here could grow to €40 billion and say we should be saving a lot more than the current allocations to the State's savings funds.
The windfall has also coincided with a worrying increase in Government spending, over and above what IFAC deems sustainable.
It might be that the bigger threats facing the Irish economy are coming from within – housing, government spending, energy security, the high cost of doing business – rather than those emanating from abroad.