Abstract
1. Ireland revenue intake has been strong in recent years, but its tax base remains narrow and reliance on income taxes has increased fiscal vulnerabilities. In particular, increased reliance on potentially volatile and highly concentrated corporate income tax (CIT) revenues on the one hand, and growing expenditure pressures on the other present a challenge to the sustainability of public finances and requires preemptive reforms to broaden the tax base, reduce tax expenditures, and raise the efficiency of public spending. Furthermore, long-term demographic trends highlight the need for reforms to safeguard the sustainability of the pension system.
Ensuring an Inclusive and Growth-Enhancing Fiscal Policy Mix1
A. Context
1. Ireland revenue intake has been strong in recent years, but its tax base remains narrow and reliance on income taxes has increased fiscal vulnerabilities. In particular, increased reliance on potentially volatile and highly concentrated corporate income tax (CIT) revenues on the one hand, and growing expenditure pressures on the other present a challenge to the sustainability of public finances and requires preemptive reforms to broaden the tax base, reduce tax expenditures, and raise the efficiency of public spending. Furthermore, long-term demographic trends highlight the need for reforms to safeguard the sustainability of the pension system.
2. This paper reviews Ireland’s challenges and reforms needed to meet the above challenges. It assesses the scope for improving the tax system towards a more growth-friendly structure, and for achieving efficiency gains in public expenditure. It also discusses upcoming impediments to long term fiscal sustainability and proposes. options to achieve a more growth-friendly and equity-enhancing revenue and expenditure policy mix.
B. Revenue Composition
3. Ireland’s ratio of tax revenues to GDP is the lowest in the EU. Even when measured against the much smaller GNI*, it is still below the EU average. In addition, its reliance on income taxes is significantly larger than the OECD-Europe average, especially regarding personal income tax (PIT), which accounts for about 30 percent of total tax revenue. And while progressive, with large share of the workforce exempt from paying income tax, a large burden falls on the rest of taxpayers, as very high marginal tax rates apply at relatively low levels of income. Furthermore, despite having one of the lowest statutory CIT rates in Europe, the share of CIT taxes in total revenue is much larger than the EU average. Building a more resilient revenue structure is, therefore, needed to ensure stable revenue sources. With an already high PIT burden, the challenge will be on broadening the tax base.
Irish Tax Revenue Structure vs. Europe-OECD, 2020
(Percent)
Citation: IMF Staff Country Reports 2022, 214; 10.5089/9798400213380.002.A001
Sources: OECD and IMF staff calculations.4. New international taxation rules could have an impact on future CIT revenues.2 CIT revenues have increased over the past years, reaching an all-time high close to 3.5 percent of GDP in 2021 and becoming the third-largest source of government income. It is also highly concentrated, with over half being paid by the top ten taxpayers, many of which are affiliates of U.S. multi-national enterprises (MNEs). The prospective changes in international CIT rules, will likely apply to the large MNEs and only a very small number of big domestic Irish companies, mainly in the retail and utilities sectors. The authorities estimate the new rules could cost roughly 2 billion euros (or about half a percent of GDP) in lost revenue annually. However, there are uncertainties around the future impact related to ratification by the different countries and finalizing the details for a common framework for the reallocation of revenues.
Concentration of CIT Receipts
(Percent net receipts by top 10 companies)
Citation: IMF Staff Country Reports 2022, 214; 10.5089/9798400213380.002.A001
Source: Fiscal Council.C. Growing Expenditure needs and Long-Term Spending Pressures
5. Ireland faces growing expenditure needs to facilitate the transformation to a more inclusive growth. Higher spending on infrastructure, housing, social protection, green transition, as well as education, training, and active labor market policies are needed to help the green and digital transformation of the economy and support the reallocation of labor to the growing sectors. Furthermore, well-designed, and targeted public spending would help increase the productivity of the indigenous sectors, particularly for SMEs, and deepen the inward linkages of MNEs, thus broadening the benefits for growth to a wider portion of the population. While Ireland has stepped up public investment in recent years, including in infrastructure, further increases will be needed to compensate for the post-global financial crisis (GFC) underinvestment and to address the new challenges from the ambitious climate action commitments and the digital transformation of the economy.
6. Under the 2021 National Development Plan (NDP), the government plans to significantly expand investment to historically high levels over the medium term. The NDP envisions maintaining public investment at approximately 5 percent of GNI* through 2030, and a total allocation of €165 billion, focusing on supporting housing, climate goals, transportation, healthcare, and jobs growth.3 It is estimated that, by the end of the decade, the investment plan could boost growth by about one percentage point.4 Efficient and well-targeted investment strategies will be key to maximize the impact on long-term growth and prevent capacity utilization bottlenecks, thus securing high value for the taxpayers.
7. Demographic trends will also put pressure on long-term public finances. Ageing-related spending is expected to increase considerably over the next decades even compared to peer countries. Without broadening the tax base, this could imply difficult spending trade-offs and contribute to fiscal vulnerabilities. Timely reforms to contain ageing-related budget expenditure and improving spending efficiency will reduce vulnerabilities and ensure adequate funding for the NDP’s ambitious investment agenda. Furthermore, long-term expenditure pressures will require increased spending on health, social protection, and pensions over the coming years, therefore, improving public expenditure efficiency particularly in these areas is a priority.
Change in Ageing-related Public Expenditure, 2019–60
(% pts of potential GDP)
Citation: IMF Staff Country Reports 2022, 214; 10.5089/9798400213380.002.A001
Source: OECD Economic survey 2020.8. Good progress has been achieved in raising public spending efficiency but there is scope for further improvement. The 2017 IMF’s Public Investment Management Assessment (PIMA) identified the need to strengthen adherence to budgeted targets and to enhance the implementation of infrastructure projects and maintenance of public assets. Significant progress has been achieved in planning, allocation and monitoring of projects through the establishment of the National Investment Office. The introduction of annual spending reviews has also been helpful in reallocating resources within current expenditures, and the introduction of the investment project tracker has been instrumental in enhancing transparency and monitoring expenditures. However, deeper sectoral analyses and further progress to improve the process of project selection and management are needed. Progress in the context of the Spending Review and Performance Budgeting processes is also welcomed.5 Further effort should be made to systematically collect information on the performance of existing public assets across sectors to better enable transparent, evidence-based prioritization of future infrastructure projects.6
Ireland: Implementation of 2017 PIMA Recommendations
Ireland: Implementation of 2017 PIMA Recommendations
| Progress Achieved | More Progress needed |
|---|---|
| Planning. Establishment of the National Investment Office. Integration of major infrastructure projects in with one single national strategy (National Development Plan). Maintenance of public assets. | Strengthening adherence to budgeted targets in certain sectors. Systematically collect information on the performance of existing public assets across sectors. |
| Allocation and Monitoring. Introduction of a capital tracker to monitor major investment projects. Improvements in risk assessments Improving data collection and identifying data gaps. Implementation of a cost validation system for large projects prior to approval. Introduction of post project implementation reviews. | Further build on the capital tacker to make it more useful across sectors and allow for timely advice. |
Ireland: Implementation of 2017 PIMA Recommendations
| Progress Achieved | More Progress needed |
|---|---|
| Planning. Establishment of the National Investment Office. Integration of major infrastructure projects in with one single national strategy (National Development Plan). Maintenance of public assets. | Strengthening adherence to budgeted targets in certain sectors. Systematically collect information on the performance of existing public assets across sectors. |
| Allocation and Monitoring. Introduction of a capital tracker to monitor major investment projects. Improvements in risk assessments Improving data collection and identifying data gaps. Implementation of a cost validation system for large projects prior to approval. Introduction of post project implementation reviews. | Further build on the capital tacker to make it more useful across sectors and allow for timely advice. |
9. Healthcare spending has increased significantly over the past years and, at 20 percent of total public expenditure, is the highest in the EU. A significant portion of this increase has been unplanned, with pre-pandemic health spending accounting for 56 percent of total overruns.7 While much of the increased spending is due to the pandemic, there was already a history of spending over runs. Most of the overspending is run by hospitals, largely going towards wages. Furthermore, limited community care capacity and a complex system of collaboration between private practices and public hospitals have contributed to long waiting lines in the public system and to cost inefficiencies. With a significant commitment to healthcare reform under the Sláintecare to date and over the next few years, addressing these challenges will be key to deliver the intended output and safeguard the limited fiscal resources.
Increases in General Government Healthcare Spending
(Billion euros)
Citation: IMF Staff Country Reports 2022, 214; 10.5089/9798400213380.002.A001
Sources: Department of Finance and Fiscal Council calculations.Note: Data shown in Exchequer gross voted current spending terms. 2019 is an estimate.General Government Health Expenditure
(Percentage of total general government expenditure, 2020)
Citation: IMF Staff Country Reports 2022, 214; 10.5089/9798400213380.002.A001
Source: Eurostat.10. Social protection spending in Ireland is effective overall, but there is scope to increase its efficiency. There is an already high achievement regarding the intended strong redistributive impact of social spending8 and targeting of measures has improved. However, measures of income poverty and material deprivation point to consistent high incidence of low living standards among lone parents, their children, and those of working age in households without anyone in paid work. The relative poverty rate shows a varied degree of success across age and household status groups. In particular child poverty rate has declined at a much slower pace and has been higher than the EU average during 2017–19.9 Efficiency of social protection spending can be increased by improving the coverage and targeting of existing programs to the most vulnerable groups and further reducing transfers to high income households.
Share of Public Cash Transfers Received by Working-age Individuals in Low and High-income Groups, in 2016
(Percent)
Citation: IMF Staff Country Reports 2022, 214; 10.5089/9798400213380.002.A001
Source: OECD.At risk-of-poverty Rate Gap by Age Groups
(Percent)
Citation: IMF Staff Country Reports 2022, 214; 10.5089/9798400213380.002.A001
Source EurostatNote The relative median at-risk-of- poverty rate gap is calculated as the difference between the median equalised disposable income of people below the at-risk-of-poverty threshold and the at-risk-of-poverty tines hold., expressed as a percentage of the at-risk-of-poverty threshold (cut-off point 60% of median equivalised income).D. Towards an Inclusive and Growth-Enhancing Policy Mix
11. The stylized facts presented above highlight the need for reforms to broaden the tax base and find new and stable sources of revenues as well as improving public expenditure efficiency. A narrow tax base and increased reliance on relatively uncertain CIT revenues can limit budget flexibility. Most of the CIT revenue overperformance has been allocated to permanent expenditure measures or funding budgetary overruns. Spending overruns have been particularly large in health and in the implementation of the few large public investment projects.10 With limited revenue flexibility, future cost overruns could crowd out spending priorities and derail efforts to reduce public debt. The fiscal policy mix should, therefore, aim to secure stable resources to finance the authorities’ investment strategy as well as the social and aging-related expenditure needs.
12. A broad and stable revenue base is needed to mitigate vulnerabilities and support priority expenditures. Several reforms can be implemented to expand and diversify tax revenue:
a. There is scope to improve the PIT system and reduce administrative costs. As previously recommended by staff, an introduction of one or two additional tax bands and rates to the PIT would help broaden the tax base and reduce disincentives to work, while preserving the simplicity and progressiveness of the system.11 When combined with means-tested cash transfers for low-income households, it would ensure a more robust, incentive compatible, and equitable tax system. Furthermore, recalibrating the income tax system by absorbing the Universal Social Charge (USC) could help reduce administrative costs.12
b. Efficiency gains can be achieved by simplifying the VAT system. Ireland’s VAT system includes 5 tier rates, which could render the system complex and prone to significant VAT tax expenditures. Compared to other OECD-European countries, Ireland has a relatively low VAT revenue ratio (VRR)13, implying that an important share of potential VAT revenues can be collected. Furthermore, while the estimated VAT gap for Ireland is low in comparison to peers, it is still significant. Streamlining the system and improving tax administration could, therefore, yield revenue benefits and reduce VAT tax expenditures. Any negative impact on low-income households can be mitigated by means-tested income support measures.
VAT Gap
(Percent)
Citation: IMF Staff Country Reports 2022, 214; 10.5089/9798400213380.002.A001
Sources: Nerudova and Dobranschi, 2019.Notes: The VAT gap is the difference between the expected VAT revenue and the amount collected and measures the effectiveness of tax compliance measures.VAT Revenue Ratio
(Percent, 2018)
Citation: IMF Staff Country Reports 2022, 214; 10.5089/9798400213380.002.A001
Source: OECD.c. Raising property taxes from their current low level would be a growth-friendly and efficient option. Ireland’s intake from property taxes is substantially smaller than EU peers. Property tax rates remained largely unchanged since 2013 and the revaluation of homes has been infrequent. As the tax was based on 2013 values, all homes bought since 2013 by first-time buyers and newly built homes were excluded until the reform of the system in 2021. This reform constituted a welcome step in modernizing the system and broadening its base. Under the new rules, properties would undergo updated valuations every four years, and houses not previously included in the taxation system will now be covered. Further reforms should aim to gradually increase the tax rate itself from its low level while ensuring adequate social protection.
Tax on Property, 2020
(Percent of GDP)
Citation: IMF Staff Country Reports 2022, 214; 10.5089/9798400213380.002.A001
Source: OECD.13. Public spending should focus on growth-friendly spending and reducing efficiency gaps. Investing in health, education, and social protection can help increase human capital and labor productivity, reduce disparities, and strengthen MNEs’ inward linkages, while investing in physical capital can have a large impact on improving regional equity and future growth. Public resources can be more effectively used by improving the targeting of social programs to vulnerable groups. Strengthening budget planning and controls would bring credibility and transparency to the health budget and help reduce the incidence of unplanned spending. Following up on recommendations for the health sector’s Accountability Framework should also be followed through. Well-targeted, efficient investment will be key to maximize public investment returns. Therefore, the authorities should continue to make progress on the remaining steps to enhance the implementation of infrastructure projects and strengthen adherence to budgeted targets. Given the significant share of construction in most investments, addressing existing bottlenecks in this key sector, and improving coordination of project implementation would help improve efficiency and reduce delays.
14. Decisive reforms are needed to ensure the future sustainability of the pension system and safeguard long term fiscal sustainability. While Ireland has one of the youngest populations in Europe, it is still aging fast, with its old-age dependency ratio expected to more than double over the next decades. The retirement age of 66 years has not adjusted to Ireland’s increasing life expectancy (80 years). As a result, the length of time in retirement is expected to become one of the longest among European OECD countries. In the absence of reforms, it is estimated that by 2030 the annual financing gap in the social insurance fund will reach €3.3 billion, increasing to over €22 billion by 2071 (equivalent to a cumulative funding gap of about €335 billion in present value terms).14 Increasing the retirement age in line with previous plans will be a necessary step to gradually restore sustainability. Linking increases to improvements in life expectancy would be essential to ensure the long-term sustainability of the system. Furthermore, with a relatively low share of social security contributions in tax revenues, there is scope for an increase in mandatory contributions.
Time in Retirement
(Year)
Citation: IMF Staff Country Reports 2022, 214; 10.5089/9798400213380.002.A001
Sources: OECD 2019 Pensions At a Glance.Social Security Contributions
(Percent of Taxation)
Citation: IMF Staff Country Reports 2022, 214; 10.5089/9798400213380.002.A001
Source: OECD.E. Conclusion
15. Ireland’s low tax revenue ratio may limit the government’s scope to meets its growing spending needs. Therefore, securing stable resources and ensuring high quality of expenditure will be required to meet social and infrastructure investment needs as well as future demands on public finances from demographic changes. Efforts should focus on broadening and diversifying the tax base, maximizing public investment returns and improving the adequacy and targeting of social spending. An effective way to increase tax revenue is making more use of less distortionary taxes, such as property taxes while reducing tax expenditures. To make the best use of public spending, progress should continue on the remaining steps to further enhance public investment, strengthening adherence to budgeted targets and improving existing social protection programs so resources reach the most vulnerable segments of the population.
References
Department of Finance. “Ageing Report: Ireland Country Fiche”. January 2021.
Department of Finance. “Submission to Commission on taxation and Welfare”. February 2022.
European Commission, 2022. Ireland 2022 Commission Report.
Irish Fiscal Advisory Council 2019a. Fiscal Assessment Report, November 2019.
Irish Fiscal Advisory Council 2021b. “Ireland’s Next Ramp-up of Public Investment”.
Irish Fiscal Advisory Council 2021c. “The Path for Ireland’s Health Budget”.
International Monetary Fund, 2016a. Country Report No 16/257.
International Monetary Fund, 2019b. Country Report No. 18/194
International Monetary Fund, 2019c. Country Report No 19/165.
KPMG. “Actuarial Review of the Social Insurance Fund”. December 2015.
Organization for Economic Co-operation and Development (OECD), 2020, “OECD Economic Surveys: Ireland 2020,” February 2020. Paris.
The Pensions commission. “Report of the Commission of Pensions”. October 2021.
Prepared by Karina Garcia.
The new rules are based on a two-pillar framework. Aiming for a fairer distribution of profits and taxing rights, Pillar I proposes a reallocation of some taxing rights over large MNEs from their home countries to the markets where they have business activities and earn profits, regardless of physical presence. Under pillar II, a minimum effective corporate tax rate of 15 percent will apply to multinationals with a turnover in excess of €750 million. The new rules are not likely to come into force before 2024.
“Ireland’s Next Ramp-up of Public Investment”. Irish Fiscal Advisory Council (IFAC) 2021.
IMF Country Report No 16/257.
Fiscal Council. Fiscal Assessment Report, November 2019; and IMF Country Report No. 18/194
The Income Tax is levied on total income, according to four social circumstances (marital and family status) and taxed in two bands (20 percent and 40 percent).
See IMF Country Report No 19/165.
The VRR is the ratio between the actual VAT revenue collected and the revenue that would theoretically be raised if VAT was applied at the standard rate to all final consumption.
