The stark differences between UK and Irish budgets

PA and Reuters

Irish Chancellor of the Exchequer Jack Chambers and British Chancellor of the Exchequer Rachel Reeves.

Dublin was bathed in golden autumn sunshine as Ireland's Chancellor of the Exchequer delivered his budget proposals on Tuesday afternoon.

Minister Jack Chambers said his budget provided “the ways and means to continue to deliver more bright and hopeful days for us all”.

He announced a series of one-off living expenses payments, including 250 (208) to every household to help with energy costs.

He also gave the first details on how the 14 billion (11.7 billion won) Apple tax windfall, which forms part of the 25 billion (20.8 billion) budget surplus the government will have this year, will be used.

The contrast with the upcoming UK budget could not be starker.

Expectation management?

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Millions of UK pensioners will lose their winter fuel bills

The Prime Minister set the tone in August, warning that the budget would be “painful” and that the government would have to make “big demands” from the public.

The pain comes as the universal 300 winter fuel payment for pensioners ends.

Much discussion of the budget has focused on the “22 billion black hole” in public finances and whether it should be filled by raising taxes, cutting spending or adjusting “fiscal rules” to allow more borrowing.

With the UK government engaged in expectation management, the budget may be less disastrous than advertised.

On Friday the Prime Minister gave a strong hint that he would change his own borrowing rules to allow for much greater investment in major projects.

However, there are currently fundamental differences between the two economies.

Like many countries, the UK is experiencing a budget deficit. This means you are spending more than you are receiving in taxes.

tax incentives

While the UK spends more than it receives in taxes, Ireland is in the unusual position of running a large budget surplus.

Ireland is in the unique position of running a large budget surplus that gives the government many spending options.

The reason Ireland can do this is because one pillar of its long-standing economic strategy has achieved tremendous success in recent years.

Since the 1950s, Vietnam has adopted a policy of using tax incentives to attract foreign investment.

Even during a period of national bailouts and austerity in the late 2000s, the government maintained a corporate tax rate of 12.5%, the lowest among developed countries.

In the middle of the last decade, some of the world's largest companies began reorganizing their operations in Ireland to pay higher taxes.

Ironically, this was partly a response to pressure on large corporations to clean up their tax practices.

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In 2017, Ireland raised just over $8 billion in corporate taxes.

The principle is that companies should report profits in locations where they have substantial operations or activities, not in low-tax locations where they have offices with few employees.

Ireland fit this bill. Although Ireland has been a tax-friendly jurisdiction, companies such as Apple have long had a physical presence in the country, employing thousands of employees.

Next was the legal transfer of intellectual property (IP) assets to Ireland, which was the most valuable revenue generator for these companies.

Apple's movement of IP assets in 2015 is widely believed to be responsible for the sharp swings in the country's GDP that year.

Profits generated from these assets resulted in corporation tax receipts flowing into Irish revenues.

In 2017, Ireland raised corporate taxes by just over $8 billion.

By last year, that amount had ballooned to nearly $24 billion and is expected to reach just under $30 billion this year.

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The Prime Minister said the government would have to make “big demands” from the public.

Ireland's Fiscal Advisory Council, an independent budget watchdog, said it expected large headline surpluses over the next few years, but that this would be “entirely driven by special corporation tax revenues”.

We used Treasury estimates of how much of these taxes would be “windfalls” to calculate that the primary budget deficit could be up to $50 billion over the 2024-2030 period.

The government has acknowledged that this tax bonanza may come to an end at some point and has begun setting up a sovereign wealth fund to invest some of the windfall corporate tax proceeds.

The consultation document for the wealth fund included a view of the Irish Sea.

It was noted that no long-term savings vehicles were established when Britain discovered oil in the North Sea, and instead income and corporation tax rates were successively lowered in the 1980s.

“So in effect at least part of the windfall was used to fund direct tax cuts.”

It also looks at Norway, which used oil money to create one of the world's largest wealth funds, concluding that “the contrasting approaches of two mature developed economies that have recorded large windfall profits offer important lessons.”

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