Tax windfalls offer opportunity to deal with future pension costs, says watchdog

By David Young, PA

Multi-billion euro windfalls from excess corporation tax offer Ireland a “huge opportunity” to deal with surging pension costs for future generations, a fiscal watchdog has said.

The Irish Fiscal Advisory Council has highlighted the potential benefits of diverting the tax income generated by major multinationals into a long-term investment vehicle.

Appearing before an Oireachtas committee, council members also reiterated a warning against using the windfalls to fund permanent tax and spending commitments in the present day, cautioning that such a move risked overheating the economy.

The council has estimated that €11.5 billion of corporation tax collected in Ireland last year was generated by the worldwide activities of multinational companies with bases in the country.

The watchdog cautioned against using this “excess” to commit to permanent policy moves in the coming budget, noting there is no guarantee about the level of this tax take into the future, as it is dependent on changes in the international tax environment.

Vice chair of the council Professor Michael McMahon said using the windfall to invest in the longer term would enable Ireland to deal with costs related to an aging population.

“The council assesses that saving windfall corporation tax receipts to address ageing-related costs would be beneficial, given the substantial risks to the economy and public finances from using these to fund ongoing commitments,” he said.

“This presents a huge opportunity to finally tackle a substantial portion of ageing costs, something still not addressed, considering that plans to increase the pension age were abandoned.”

Professor McMahon said the cost of not raising the pension age from 66 to 67 would be €5 billion a year by 2050.

He said aged-related costs would rise by nine percentage points as a proportion of modified gross national income (GNI*) by the same year.

“The wonderful thing about costs that are coming in the future is that if you take some even relatively small amounts of action now, over 20 to 25 years these things add up to a lot,” he said.

“What would be really a real tragedy would be to not do anything.

“And then for those of us in these positions in 2035 or 2040 to be suddenly facing decisions of the scale of five, eight, nine percentage points of GNI* as actions that need to be taken suddenly and quickly.

“That I think could be a really big fiscal adjustment and you wouldn’t want to make it at that point.”

Professor McMahon said the creation of such an investment vehicle would also enhance Ireland’s fiscal credibility internationally.

He added: “It would mean that the existing challenges of the day, whether the day is 2030, 2035 or 2040, would not be dominated by the pension question and could be addressed to a number of other whatever the social challenges are of that time. That to me that’s the main benefit.”