3 days ago
State to lose tax revenues as people move to electric vehicles but missed climate targets will cost us
Tax revenues could fall by as much as the Universal Social Charge brings in each year as more people switch to electric vehicles and renewable energy sources, the Irish Fiscal Advisory Council has warned.
However, the budgetary watchdog has warned that missing key climate transition targets would be much costlier and could amount to €5,000 for every person in the country.
In its biannual Fiscal Assessment report, the Council warned that the Government's two-year forecast horizon is much too short, and the twin challenges of an ageing population and the climate transition cannot be adequately prepared for.
In relation to climate change, the Council estimated that 'reasonably manageable' spending increases of approximately €2bn per year will be required to achieve the necessary transitions.
However, they said a bigger challenge will be to replace the taxes likely to fall away as people shift to cleaner transport and energy. The Council said the current tax system would raise far less revenue in a future where electric vehicles and renewable energy become the norm. If today's tax system was left unchanged, they said the fall in annual revenues would amount to €5bn in today's money, almost as much as the USC tax raises.
While the climate transition raises challenges for tax revenues, the Council warned that doing nothing has substantial costs. "If Ireland fails to reduce its emissions, as it currently looks set to by a wide margin, it may have to transfer an enormous amount of money to neighbouring countries," the report states, with the government required to purchase transfers or credits from other countries, the costs of which could be extremely high.
The Council estimates that the costs of missing climate targets could reach as high as €26bn. "A transfer of as much as €26bn would be a colossal waste of taxpayers' money — equivalent to almost €5,000 for every person in Ireland," the report warns. "Instead of transferring this money to neighbouring countries, the government should take more effective action to avoid these costs, reduce energy costs and pollution, and improve people's health."
In relation to Ireland's ageing population, the report said that action taken sooner rather than later will ultimately be less costly. "While other countries are experiencing ageing populations, Ireland is facing a more rapid change," the report states, warning that by 2057, one in three people will be over the age of 65, putting more demand for healthcare, long-term care and pensions. It will also mean slower growth in the economy and hence in tax revenues.
The Council said the steps taken by the Government should have an impact. The Future Ireland Fund has been established as a way of saving the 'extraordinary' corporation taxes being collected. The Government has planned gradual increases in Pay Related Social Insurance (PRSI) to help fund increased spending needs.
"Modelling by the Council suggests that the Future Ireland Fund could make a substantial dent in ageing costs, covering more than half of the rise in annual spending associated with ageing between 2023 and 2041 and a quarter by 2050," the report states.
"On their own, these measures will still not fully offset costs associated with ageing. However, they are an important part of the solution to dealing with these costs, which will fall much more heavily on the next generation of taxpayers."
