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Corporation-tax take ‘likely to remain high’
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06 Oct 2022 / ireland Print

Corporation-tax take ‘likely to remain high’

The Economic and Social Research Institute (ESRI) has said that receipts from corporation tax are likely to remain high, despite concerns about their sustainability.

In its latest quarterly economic commentary, the think-tank looks at the possible effect of changes in the way multi-national companies are taxed.

Its analysis concludes that an increase in the effective tax rate to 15%, and the continued profitability of large US firms, mean that it is “likely” that corporation-tax revenue will remain close to current levels.

“Despite this conclusion, it must be recognised that the potential relocation of these large MNEs [multi-national enterprises], while unlikely, exposes the Exchequer to idiosyncratic company-specific risk,” the ESRI warns.

One-off measures welcomed

The commentary warns that the scale of the Budget 2023 package to deal with the cost-of-living crisis may fuel inflationary pressures.

It welcomes, however, the use of one-off measures to target energy costs, and the commitment to add to the ‘rainy-day fund’.

The ESRI says that the Irish economy has shown “a significant degree of resilience”, despite extraordinary uncertainty in the international economy.

It forecasts that Modified Domestic Demand (MDD), a measure of the performance of the domestic economy, will grow by 7.5% this year, boosted by higher household spending and investment.

Concerns about UK

The think-tank has, however, lowered its MDD forecast for 2023 to just 2.5%, as the deteriorating outlook for most large economies hits investment and exports. It has particular concerns about the British economy.

“While the Irish financial sector is in a much more stable position than it was in 2007, and is less integrated with the UK sector than before, it is very difficult to fully assess the contagion effects of a possible full-blown financial crisis in the UK,” the commentary warns.

The institute believes that a recovery in the labour market and a surge in tax receipts will lead to a Government surplus this year and next year.

It expects inflation to continue rising throughout the winter, however, before easing next year. The ESRI expects an average inflation rate of 8.1% this year, and 6.8% in 2023.

House prices overvalued

The report forecasts that 28,000 new homes will be built this year, falling slightly to 26,000 next year, mainly due to higher costs of building materials.

A model used in the commentary also suggests that house prices are overvalued by around 7%, and suggests that one reason for the over-valuation may be the increasing share of the market taken by non-household buyers.

The ESRI adds that, as a recent pandemic-driven surge in savings subsides, recent increases in house prices are likely to “moderate substantially” in the short to medium term.

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