'Credible' fiscal anchor needed, Central Bank governor says
An analysis by Central Bank staff has found that the Government will need to spend an additional €265bn between now and 2050 to fund higher age-related spending and to meet housing and net-zero targets.
In that context, Mr Makhlouf has told Paschal Donohoe that it is important the Government keeps putting money into two long-term savings funds, but that they are not seen as a panacea.
'For example, the Future Ireland Fund will be insufficient – on its own – to fund the higher level of public expenditure required to meet the needs of an older population and to fund climate and housing investment,' his letter said.
'Taking prompt and concrete action to broaden the tax base would help to ensure that additional known expenditure needs can be met sustainably even if corporation tax was to decline significantly.'
The Central Bank governor also believes that public investment alone will not be enough to fix the housing shortage and to build the necessary infrastructure. 'Fiscal and broader public policy should more actively consider reforms to crowd-in private investment and to promote productivity growth,' he said.
The governor writes to the Minister for Finance every year before the Budget, to provide analysis and comment. This year's letter repeats earlier calls by the regulator for the Government to put a ceiling on its spending.
'A credible fiscal anchor is needed to guard against repeating mistakes of the past and to support rigorous expenditure control and enable longer-term investment,' the letter says.
The last government introduced a rule in 2021 to limit the increase in spending to 5pc a year, net of taxes. The rule was never adhered to, and this government has not set a new one.
There are signs that a benign combination of factors – including exceptional corporation tax receipts and a rapidly growing economy – could be threatened in the future. The risks of a loss of corporation tax, and other taxes that depend on multinationals, have increased due to recent international developments.
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Mr Makhlouf said the Central Bank's analysis of what would happen if 'excess' corporation tax was lost, and there was a reduced investment by the multinational sector in Ireland, was that the budget deficit could rise to over 4pc of national income by 2030.
Foreign-owned multinationals in the manufacturing sector and ICT generate about 20pc of all tax and PRSI, his letter points out. In addition, the income tax base is highly concentrated with 8.5pc of the highest earners paying 56pc of income tax and USC.
'The VAT base also appears relatively narrow by EU comparison owing to both changes in the composition of household expenditure and the widespread application of reduced and zero rates to a variety of goods and services.'
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