Ireland wants to put its soaring corporate tax receipts into a new sovereign wealth fund

Ireland is considering funneling some of the bumper tax income it’s receiving from the many multinationals based in the country into a new sovereign wealth fund.

The move would be an effort to shore up public finances into the future — when annual income may be less reliable than it is now.

A paper to be submitted to the Irish Parliament on Wednesday by Finance Minister Michael McGrath looks at the benefits of setting up a new “longer-term public savings vehicle to which windfall receipts could be channelled.”

Previous reports have suggested the new fund would be used to continue to pay down debt as well as on pensions and heath care spending.

Ireland’s corporate tax receipts have rocketed over the last decade and have hit record highs since the pandemic, rising 30% year-on-year in 2021 and up another 48% in 2022 to a record 22.6 billion euros ($24.8 billion).

That has come from tech giants including Alphabet, Meta, Intel, LinkedIn and Amazon, along with firms like Pfizer and Johnson & Johnson.

Multinational-dominated sectors now account for more than half of GDP and around a quarter of tax revenue in the country of just over 5 million people, with many firms attracted by its low 12.5% corporate tax rate.

Ireland’s government surplus was 8 billion euros last year despite its spending on energy support packages and other measures, 1.6% of GDP — one of few EU countries to record a surplus.

The government expects this to swell further in the coming years, with the surplus totaling 65 billion euros over four years and potentially hitting 6.3% of gross national income — GDP plus all net receipts — by 2026.

Ireland has also been chipping away at its debt-to-GDP ratio over the last decade since it hit a record high in the wake of 2008, which saw a crash from its Celtic Tiger years into a severe recession and crises in employment, property and banking.

Unemployment is today at a record low. But continued challenges surround upgrading the country’s infrastructure and a chronic housing shortage.

McGrath also highlights “substantial fiscal risks in the medium-term” around caring for Ireland’s ageing population. People born in Ireland from 2020 onward have among the highest life expectancies in the EU, and the Department of Finance estimates age-related spending will increase by 7-8 billion euros between 2020 and 2030.

In 2021, Ireland agreed to an Organization for Economic Cooperation and Development (OECD) plan for a global rate of 15% tax — a move set to be phased in from 2024, but that has been flagged as potentially jeopardizing Ireland’s attractiveness to big firms, particularly as many attempt to rein in spending in the wake of recent interest rate rises.

Ricardo Amaro, senior economist in the euro zone team at Oxford Economics, noted that the government’s forecast of a fiscal surplus of over 6% of national income by 2026 was “highly conditional on the assumption of no major shock to corporation tax receipts.”

“The problem is that a large share of these revenues are very unpredictable in nature, and highly concentrated in a handful of multinational companies,” he told CNBC.

A sovereign wealth fund that aims to keep these revenues aside for longer-term investments instead of day-to-day spending could therefore be a “useful tool” — but he said that given there are existing similar funds in Ireland, details will be key.

“The risk is that the contributions to the pot become too dependent on politicians’ discretion, and ultimately turn out to be too small relative to the size of the windfall corporation tax receipts,” Amaro said.

“In that sense, it is likely that the already existing expenditure rule which limits annual spending increases to 5% remains the primary tool in Ireland’s fiscal framework.”

Correction: This story has been updated with the correct figure for Ireland’s future budget surplus.