Managing Risks and Building Resilience in the Public Finances

Strong economic growth and exceptional corporation tax receipts have benefitted the public finances over the last decade but these benign conditions are threatened. Risks to the public finances and the economy from Ireland’s reliance on multinational firms have risen given recent developments in the US and the more disruptive international economic environment. A loss of corporation tax – most notably, of the windfall receipts of recent years – along with weaker economic growth and lower multinational investment would result in a deficit in the public finances of over 4 per cent of national income by 2030, in the absence of corrective action. To improve long-term growth and the resilience of the economy, increases in public investment that address current infrastructure gaps are needed. These should be implemented in a way that is consistent with long-run economic and fiscal sustainability. With current full-employment conditions and in the absence of offsetting revenue-raising measures, further large increases in public investment on top of existing plans could aggravate overheating pressures. If economic activity slows markedly, then increases in public investment could be accommodated with lower inflationary risks and would help to support demand. Implementing measures to broaden the tax base would improve the resilience of the public finances should CT revenue decline. Moreover, it would help to ensure that growing public expenditure needs from an ageing population, to fund new infrastructure and to meet emission reduction targets can be sustainably met.