Ireland’s Tax Windfall Drives Huge Election Spending Promises

(Bloomberg) -- Ireland's election, like so many this year, has been littered with politicians promising voters the earth. What makes this different is that whoever wins has the money to deliver on many of their promises.

The country is flush with cash, raking in billions of euros in taxes from US firms with operations there, as well as a one-off payment from Apple Inc. There's no guarantee that the money will keep flowing in at the same rate, but the pot is proving attractive to politicians trying to woo voters ahead of polling day on Friday.

The governing coalition kicked off the spree with a giveaway budget in October as Prime Minister Simon Harris sought to protect his lead in polls. During the election campaign, all parties have promised a range of tax cuts and investment programs ahead of what looks like an increasingly tight vote.

With so much money available, at stake is whether Ireland has learned the lessons of the past, can better manage its finances and avoid another domestically driven boom-and-bust cycle.

The government badly miscalculated before, in the early 2000s, when public spending soared during a period of rampant bank lending and house price growth. That era — known as the Celtic Tiger — ended in a catastrophic property crash that crippled banks and left the country in need of a bailout from the European Union and the IMF.

Now the government is making an effort to be responsible, putting aside huge sums into a sovereign wealth fund. Set up this summer and already at more than €8 billion, the aim is to grow it to as much as €100 billion in a decade.

The fund can be tapped from 2041, but crises in areas like housing and healthcare means there’s a need for spending right now. In addition, politicians are fighting for election votes. Harris's Fine Gael is proposing a €1,000 payout for all newborns, an idea that rivals have likened to Celtic Tiger-era largess. Fianna Fail, its coalition partner, will cut taxes and other levies on incomes, as will Sinn Fein, which also wants to spend much more on capital projects.

"They've got this massive fiscal surplus made possible by the kind of paper profits that are located here by US multinationals," said Aidan Regan, professor of political economy at University College Dublin. "They can promise all things to everyone and that is an enviable position."

The election is likely to be close. Harris, who took over in April, called the election a few months ahead of schedule to capitalize on his lead at the time. But he’s lost that advantage and a poll Monday put no more than two percentage points between three biggest parties.

The numbers still suggest Harris’s Fine Gael will be in a position to try to form another coalition with Fianna Fail. The current incumbents have previously ruled out partnering with Sinn Fein, a once fringe party historically linked to the Irish Republican Army terrorist group.

Windfall Taxes

Attractive tax incentives — some controversial and now closed — played a large part in helping Ireland get US corporates such as Microsoft, Intel, Pfizer, Google and others to open operations and create thousands of jobs.

While the tax revenue they generate has surged, officials say some of that has a "windfall" element. Without it, this year’s estimated budget surplus of €25 billion falls to just €1.5 billion. The public finances also got a €14 billion back payment from Apple after a European court ruling.

"If you were to strip away those windfall corporation tax receipts, basically the ones that they're nice when we're getting them, we really can't plan any long-term spending around them," said Emma Howard, an economist at Technological University Dublin.

In addition, taxes are highly concentrated in a small number of US firms. Just three companies accounted for 43% of all corporation tax revenue in 2022, according to Ireland’s budget watchdog.

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That leaves the country of just over 5 million people at the mercy of factors outside its control, such as cycles in the global tech sector. And Donald Trump's presidency — with its promise of trade tariffs and protectionist measures — adds another risk.

Even if politicians can justify their promises, another issue is a poor track record when it comes to responsible spending. The latest example came just months ago in the form of a small bike shelter at parliament buildings. The revelations about the cost — almost €340,000 — sparked national outrage.

There is an “air of unreality around the entire debate," said John McHale, a professor at the University of Galway. "There is a disconnect between the risks around the future of Ireland's economic model that seem to be crystallizing with the election of Trump. But you see all the parties, to different degrees, opening the spigots."

The last time Ireland threw money around was its first real era of plenty. Donough Kilmurray, who left Ireland in the mid-1990s and worked at Goldman Sachs, remembers returning home for visits and seeing the impact of easy money, well-paying jobs and a turbocharged economy.

"We went from way below normal lending, borrowing and spending to above normal and way, way beyond it," said Kilmurray, who's now chief investment officer at Dublin broker Davy. "But we didn't know what normal was because we'd never had that access, never had that money before."

The new Future Ireland Fund is an attempt to deal with money more maturely. 

It will be run by the National Treasury Management Agency, whose building sits on the quayside of Dublin's river Liffey, next door to the central bank. It's a symbolic location, a reminder of the not-too-distant economic disasters and the behavior Ireland can't afford to repeat. 

The central bank's building was once the unfinished headquarters of the now defunct Anglo Irish Bank, whose reckless lending and attempted cover up of its finances capture much of the Celtic Tiger hubris and folly.

Frank O'Connor, chief executive officer of the NTMA, joined in 2010 and says Ireland has come a long way since then.

“When you think about the contrast'' with that period, O'Connor said. “Ireland was looking to the Troika partners to fund the country," he said, referring to the institutions that managed bailouts during the euro-area debt crisis.

Now, the FIF will use the current tax jackpot to build a cushion for the future. The plan is to add the equivalent of 0.8% of GDP annually.

The fund isn't without critics, as Ireland has immediate spending needs, particularly in housing. Parts of its electricity network are straining as power demand from users like data centers increases. Such infrastructure issues, if not addressed, undermine Ireland's attractiveness to international investment, with implications for tax revenue.

The windfall element of Ireland's riches makes its fund similar to those, like Norway's, that are built on oil and gas, according to Javier Capapé Aguilar, director of the Sovereign Wealth Lab at IE University in Spain.

"It looks like a natural resource fund, because the flow of resources looks quite stable and strong," he said. "But similarly to oil funds, they know that probably one day this source of income can disappear.’’

--With assistance from Olivia Fletcher.

©2024 Bloomberg L.P.