Income tax may need to rise if Irish economy grows too quickly, warns IFAC Income tax may need to rise if Irish economy grows too quickly, warns IFAC

Income tax may need to rise if Irish economy grows too quickly, warns IFAC
29 Jan 2018

Income taxes may need to increase if the economy overheats, the Irish Fiscal Advisory Council (IFAC) has warned.

While there is still headroom in the fast-growing economy, the watchdog says, plans to ramp up capital spending and increase the construction of new homes could soon eat up any remaining capacity.

While the IFAC is generally positive about the economic outlook, it believes that off-setting potential risks of overheating would require a more robust economic plan, according to the Irish Examiner. It says the government should be prepared to take money out of the economy by foregoing any planned tax cuts and increasing personal taxes.

The details

  • Any large rise in the construction of new homes could generate huge revenues from employment taxes on builders and Value-added tax on home sales. The IFAC says the government should be encouraged to put aside this extra cash because spending tax revenues generated by the 'tax-rich' business of building and selling homes to fuel the economy further increases overheating risks;
  • The IFAC believes some slack remains in the economy, but it is close to capacity and the so-called output gap is narrowing. The watchdog is also concerned about where building workers will come from to build the 25,000-plus homes each year that are needed to eliminate housing shortages;
  • Plans to increase capital expenditure would mean that Ireland’s spending on capital projects could jump from one of the lowest levels in the European Union (EU) during the financial crisis to the highest by 2022;
  • If the economy does continue to grow strongly, the IFAC says, the Department of Finance should redesign its proposed 'rainy day fund' and lift the funding cap of up to €500 million (US$590) a year to help absorb excess resources. The watchdog also echoed concerns outlined in an EU staff report last week over Ireland's reliance on potentially unstable taxes on commercial property transactions;
  • The increase in stamp duty to 6% from 2% announced in October has helped Ireland adhere to EU fiscal rules by offsetting other spending increases. The government aims to raise €376 million (US$444) a year from the tax.
  • Relying on corporation tax generated by multinationals is also risky, the IFAC warns. Corporation tax receipts have climbed to almost €16 billion (US$19 billion), or 16% of all government revenues. Using conventional economic measures, Irish debt shrank to only 63.7% of gross domestic product (GDP) in relation to government revenue in 2016. But using a new method of measuring the size of the Irish economy in the shape of ‘modified gross national income’ rather than GDP, Ireland has the fourth highest debt levels among the advanced economies of the Organisation for Economic Co-operation and Development.

Emma Woollacott is a freelance business journalist. Her work has appeared in a wide range of publications, including the Guardian, the Times, Forbes and the BBC.

Income taxes may need to increase if the economy overheats, the Irish Fiscal Advisory Council (IFAC) has warned.

While there is still headroom in the fast-growing economy, the watchdog says, plans to ramp up capital spending and increase the construction of new homes could soon eat up any remaining capacity.

While the IFAC is generally positive about the economic outlook, it believes that off-setting potential risks of overheating would require a more robust economic plan, according to the Irish Examiner. It says the government should be prepared to take money out of the economy by foregoing any planned tax cuts and increasing personal taxes.

The details

  • Any large rise in the construction of new homes could generate huge revenues from employment taxes on builders and Value-added tax on home sales. The IFAC says the government should be encouraged to put aside this extra cash because spending tax revenues generated by the 'tax-rich' business of building and selling homes to fuel the economy further increases overheating risks;
  • The IFAC believes some slack remains in the economy, but it is close to capacity and the so-called output gap is narrowing. The watchdog is also concerned about where building workers will come from to build the 25,000-plus homes each year that are needed to eliminate housing shortages;
  • Plans to increase capital expenditure would mean that Ireland’s spending on capital projects could jump from one of the lowest levels in the European Union (EU) during the financial crisis to the highest by 2022;
  • If the economy does continue to grow strongly, the IFAC says, the Department of Finance should redesign its proposed 'rainy day fund' and lift the funding cap of up to €500 million (US$590) a year to help absorb excess resources. The watchdog also echoed concerns outlined in an EU staff report last week over Ireland's reliance on potentially unstable taxes on commercial property transactions;
  • The increase in stamp duty to 6% from 2% announced in October has helped Ireland adhere to EU fiscal rules by offsetting other spending increases. The government aims to raise €376 million (US$444) a year from the tax.
  • Relying on corporation tax generated by multinationals is also risky, the IFAC warns. Corporation tax receipts have climbed to almost €16 billion (US$19 billion), or 16% of all government revenues. Using conventional economic measures, Irish debt shrank to only 63.7% of gross domestic product (GDP) in relation to government revenue in 2016. But using a new method of measuring the size of the Irish economy in the shape of ‘modified gross national income’ rather than GDP, Ireland has the fourth highest debt levels among the advanced economies of the Organisation for Economic Co-operation and Development.

Emma Woollacott is a freelance business journalist. Her work has appeared in a wide range of publications, including the Guardian, the Times, Forbes and the BBC.

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