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Ireland intends to invest rising corporate tax into a new sovereign wealth fund.

The Irish Finance Minister, Michael McGrath, plans to present a proposal to the Parliament that explores the advantages of establishing a fresh, longer-term public savings mechanism to direct unexpected revenue gains. In recent times, multinational companies in Ireland have contributed record-breaking amounts in corporate taxes, leading to a projected surplus of 6.3% of the nation's Gross National Income.

The proposed sovereign wealth fund aims to bolster the country's public finances in the long run, especially considering the potential future volatility in annual income. The new fund is anticipated to be utilized for debt repayment, as well as investments in pensions and healthcare.

Over the past decade, corporate tax collections in Ireland have significantly surged, reaching a record €22.6 billion ($24.8 billion) in 2022, a 48% increase compared to the previous year. This considerable growth is largely attributed to the contributions of tech behemoths such as Alphabet, Meta, Intel, LinkedIn, Amazon, as well as pharmaceutical giants like Pfizer and Johnson & Johnson.

Multinationals, attracted by Ireland's competitive 12.5% corporate tax rate, now constitute more than half of the GDP and approximately a quarter of tax revenue in a country of just over 5 million people. Despite expenditure on energy support packages and other measures, Ireland managed to secure a government surplus of €8 billion last year, making it one of the few EU nations to record a surplus.

Furthermore, the country anticipates an expansion of this surplus, potentially reaching 6.3% of its Gross National Income by 2026. The Irish government has been progressively reducing its debt-to-GDP ratio since the 2008 financial crisis, which had led to a severe recession and crises in employment, property, and banking.

However, the nation still faces ongoing challenges, such as infrastructural upgrades and a persistent housing shortage. McGrath has underscored "considerable fiscal risks in the medium term" surrounding the care of Ireland's ageing population. The Department of Finance estimates that age-related expenditure will grow by €7-8 billion from 2020 to 2030.

In 2021, Ireland concurred with an OECD initiative for a global 15% tax rate, set to be phased in from 2024. However, this move could potentially undermine Ireland's appeal to large corporations, particularly as many strive to curtail spending following recent interest rate increases.

Ricardo Amaro, a senior economist at Oxford Economics, highlighted that the government's prediction of a fiscal surplus exceeding 6% of national income by 2026 is heavily contingent upon the presumption of no major disruptions to corporate tax revenue. A sovereign wealth fund could serve as a valuable tool for reserving these funds for long-term investments rather than daily expenditure, but the specifics will be crucial.

Amaro warned of the risk of contributions becoming overly reliant on political discretion, potentially resulting in contributions being too small relative to the size of unexpected corporate tax revenue. He suggested that the existing expenditure rule, which caps annual spending increases at 5%, likely remains the primary instrument in Ireland’s fiscal framework.

This story was recently updated to correct the projected figure for Ireland's future budget surplus.

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