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The IMF gave us a good report for our Jurassic year

Tom Maguire discusses the IMF report in his Business Post column

The IMF recently issued the preliminary findings at the end of its recent official staff visit or “Mission” (as they call it); one “they chose to accept”. This was a virtual visit which took place, over a two-week period from Monday, 26th April to Friday, 7th May 2021. During the “Mission”, an IMF team of economists assessed Ireland’s economic and financial developments and discussed the country's economic and financial policies with Ministers Donohoe and McGrath, the Central Bank Governor, officials from Government Departments/Agencies and the Central Bank, the IFAC, the ERSI, Oireachtas members and representatives of the private sector. The Ministers’ departments issued their own press release subsequently welcoming the findings.

One thing that literally screams from the IMF’s page is the comment that the strong growth of MNEs softened the blow to the economy and public finances, making Ireland the only EU country with positive GDP growth in 2020. It continued that this was “due to an 18% growth of MNEs-related activities in the IT and manufacturing sectors (mostly pharmaceuticals). GDP growth for 2021 is projected at 4.6%, with domestic activities partly recovering from its sharp decline as containment measures are gradually eased and adaptability to remote working continues to increase.”

The Mission’s release covers a broad list of indicators but as always, this column is just about the tax. The IMF noted that “…Changes in international taxation can also affect both the Irish economy and the public finances. Ireland should therefore continue to build on its strong comparative advantages, such as its qualified labour force, strong and stable legal and policy environment, and favourable business climate. Policy action should also focus on enhancing social capital, particularly in education, training, health, housing, as well as digital and other physical infrastructure in order to retain FDI and amplify its positive domestic spillovers”.

We’ve seen much commentary on the shifting international tax paradigm recently especially given the EU Commission’s business taxation release earlier this week. Indeed, Minister Donohoe commented at the Department of Finance’s international tax seminar in April that agreement on OECD’s proposals would have a cost for the Irish Exchequer, which is estimated to be at around 20% of our corporate tax revenues.

Ministers Donohoe and McGrath welcomed the IMF’s view that the Government implemented a swift and comprehensive policy response that has been effective in mitigating the impact of Covid-19 on the economy that protected households and businesses. My last column outlined the speed of improvising, overcoming and adapting that our authorities had to contend with.

The IMF specifically noted that the package included unemployment benefits, wage subsidies, grants, tax deferrals, tax cuts, and loan guarantees; many of which have been the subject of this column over the past year. They continued that “Notwithstanding the large direct support, the overall deficit for 2020 was contained at about 5% of GDP …due to the strong growth in corporate income tax intake and resilient personal income tax revenue, thanks to the high progressivity of Ireland’s income taxation”. But then it added a word of caution in that the withdrawal of the support measures “should be tapered and gradual to avoid cliff-edge effects.” You’ll recall that Minister Donohoe commented to the Budget Oversight Committee that “there will be no ‘cliff-edge’ to the most important supports”.

The IMF referred to our tax regime and said “Eventually, the tax base will need to be broadened to help finance productivity-enhancing investment in human and physical capital. In this context, we welcome the establishment of the Commission on Taxation and Welfare.” We’re very familiar with this tax broadening concept as we’ve heard it many times since the last economic crisis. The IMF don’t say much this time on what they meant by that broadening other than to mention the Commission. Regular readers will know I have referred to it in the past as COT2.0 given that it will be the second Commission on Tax this century but the first to include Welfare as part of its brief. Minister Donohoe explained that COT2.0’s “…independent work will ensure the sustainability of the public finances into the medium to longer term, and identify potential reforms to the tax and social welfare system so that the evolving needs of our society can continue to be met”. So a lot to do and COT2.0 has to report by July of next year.

Anyway, back in 2019, when our world’s economic axis was less “Jurassic Park” than what we’ve been through, the IMF’s mission to Ireland went somewhat further on the detail. Back then they suggested “Broadening the tax base in a growth-friendly manner. The increase in the value-added tax (VAT) rate for the hospitality sector is a welcome step, but there is scope to further streamline Ireland’s five-rate VAT system. The Universal Social Charge (USC) in its current form largely duplicates the Income Tax but adds administrative costs. The USC could be folded into a reformed Income Tax with somewhat higher rates, broader base, and more tax bands to reduce disincentives to work, while preserving the overall yield and income redistribution features. Rather than postponing adjustments in the local property tax, implementation could be improved by adhering to the three-yearly valuation assessments and maintaining the tax rate, while capping the rate of annual tax base increases to smooth tax payments”. Some of the above are definitely not runners right about now. The year 2019 wasn’t that long ago but seems centuries ago in terms of what we’re going through right now, so we must act appropriately.

You can see where the IMF were coming from by in suggesting a wider base on which tax is payable rather than increasing rates. However, the IMF’s recommendation back then was that change be adopted in a “growth friendly manner”. In my view that’s a mantra that has to be the forefront of any tax changes coming our way.

It’s clear we will see tax changes, but we must choose wisely.


Please note this article first featured in the Business Post on Sunday 23 May and was re-published kindly with their permission on our website.
 

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