IFAC slams Budget

[Sister Sara]

It's definitely more complicated than that but it's not unreasonable to plan for it happening and act accordingly. Nobody is suggesting that we shouldn't spend any of the CT windfall, rather that it is unwise to commit more than 85% of it to recurring current expenditure.

How we spend these taxes is a separate argument and building a sovereign wealth fund does of course have merit.

I don't think a "what if, overnight" is a rational way to plan and budget for anything.

The Apple Tax award appeared 'overnight' in the media but in fact the investigation was occurring some years prior and between appeals it was probably a decade before the matter was finally settled. This gives time to plan and budget in the event for either scenario - tax lump sum for Ireland or not.
The "double-Irish" tax arrangements probably appeared 'overnight' in the media for most people but in fact there was a political build-up of pressure in Ireland and EU before then and in the end the matter was finally settled over the period of a decade or so.

The punishment for Man City being guilty (assuming appeal fails) will probably appear overnight, but in fact the investigation, subsequent charges and prospective outcome has been flagged for a number of years now that should provide time for Man City to plan ahead.

And this is my point - I am unaware of any investigation, or any political plan to change rules or any change in US Corporate sentiment towards Ireland or to the tax arrangements that Ireland currently enjoys with US multinationals.
There are no significant headwinds of an obvious nature that I am aware of and if there were, it is most likely a headwind that will provide 5,10yrs or even more. So budgeting public finances on the basis that we are running a deficit when the opposite is the case does not make sense.

One argument put forward by RTE business affairs commentator David Murphy, was "if the world’s consumers fall out of love with Apple’s iPhones and take less Mounjaro, Eli Lilly's weight loss drug, Ireland’s economic model is in deep trouble".. this is of course a possibility, but how likely is it? Does he have any information to suggest that this is occurring or likely to occur any time soon? The evidence, in Apples and Eliy Lilly's share price and profits, suggests not, so why put it forward a reason for doing anything?

Trump has been mentioned here a few times in the "what if, overnight" views. Along with his policy of bringing US corporations and profits back to US, he has also repeatedly threatened to annihilate and wipe out Iranian civilisation. I'm of the view that in the event of nuclear conflict the theory of mutually-assured-destruction (MAD) is quite valid and would likely devalue any sovereign wealth fund quite severely. But Trump is threatening it so wouldn't it be more reasonable to start building nuclear shelters and storing durable food suppplies than building a sovereign wealth fund that may disappear overnight in the event of nuclear conflict?

Or, is it better to budget on what is known and that the MAD theory has brought forward safeguards in the militaries of nuclear powers to prevent individual ego-maniacs and lunatics ever launching a nuclear strike?

 

[skrooge]

I don't think a "what if, overnight" is a rational way to plan and budget for anything

Hope for the best plan for the best then?

 

[Sister Sara]

Hope for the best plan for the best then?

If that's what you think is happening then fine, I'm of the view that is an irrational way of understanding of what is happening.

 

[losttheplot]

The risk is that 'Overnight' occurences don't tend to have any warnings. Monjaro gets linked to deaths or serious side effects, Eli Lilys profits are in trouble, maybe a few months warning. Given how our budgets go, we'd need a couple of years to adjust.
Also a shift in our government to the left will spook some of these companies as some TDs believe CT can be higher and multinationals will continue to pay.

 

[Sister Sara]

Highly unlikely that such a scenario will happen overnight. First a link will have to be identified based on years of data - you have to acknowledge this product has been rigorsly tested over a significant period of before it is released to the public? These are not 'head-shop' type products?

One of the reasons these companies are as valuable as they are is that their products are of a high quality and standard. They are quite resilient.

That doesn't mean we shouldn't be more prudent with our finances but this lurch to planning and budgeting in the absence of US corporate taxes is irrational when the reality is they are here, and for the forseeable future of next 5, 10yrs - unless someone can suggest a good reason as to why they expect that not to be the case.

 

[losttheplot]

First a link will have to be identified based on years of data

A link doesn't have to be proven to effect their profits. Link between Glyphosate and cancer isn't definitive. Didn't stop US courts awarding substantive damages. Just enough negative coverage could do damage. Same with MMR and HPV vaccines. No link proven but plenty of people with their own facts to discourage others.

Looking at risk you should consider serverity and probability of occurence. For CT loss, probability of occurence may be low but severity is high. For that reason it should be looked at.

unless someone can suggest a good reason as to why they expect that not to be the case.

The reasons have been outlined, but some reasons may be the unknown unknowns as Rumsfeld would say.

 

[Sister Sara]

A link doesn't have to be proven to effect their profits. Link between Glyphosate and cancer isn't definitive. Didn't stop US courts awarding substantive damages. Just enough negative coverage could do damage. Same with MMR and HPV vaccines. No link proven but plenty of people with their own facts to discourage others.

That's fair enough, but do you think public finances and expenditures should be managed on the basis of potential negative coverage? This is always a risk.

The reasons have been outlined, but some reasons may be the unknown unknowns as Rumsfeld would say.

The reasons have not been outlined, only a "what if tomorrow it all disappears", and as you suggest from negative coverage or unknown unknowns? How likely is it that US corporate tax receipts being booked in Ireland are to disappear?

So how do you budget for that? The unknown, unknowns, in any year?

Aliens might land from outer-space and take all our food and oil.
Nuclear war might break-out.
A plague, crop-failure, flooding, earthquakes etc
Revolution.
New companies overtaking US companies.

Alternatively, US companies advance in world markets and book increasing amounts of their profits in Ireland.

Anything can happen, how do you budget for a "anything can happen", scenario?

You can only budget for what is known, and what is reasonably expected to be known . Otherwise you are inviting chaos.

It is my view that what is known is that Ireland is running a substantial surplus and what is reasonably expected to be known is that those budget surpluses are to continue for the next 5yrs +.

How, those surpluses are managed is another argument but let's not throw the baby out with the bathwater.

I think I've argued my point. I accept others do not agree but I will leave it there.

 

[Purple]

Aliens might land from outer-space and take all our food and oil.
Nuclear war might break-out.
A plague, crop-failure, flooding, earthquakes etc
Revolution.
New companies overtaking US companies.

Alternatively, US companies advance in world markets and book increasing amounts of their profits in Ireland.

Tax revenues from, and the manufacture of, GLP-1 weight-loss drug ingredients account for 20% of our GDP. Eli Lilly has invested over $3 billion in Ireland. That is less than half of the value of the tax it pays here on global profits it chooses to book in this country each year (at $6.6 billion that figure is more than twice the amount it pays in the USA).

The State spends around €14 billion a year on all State funded pensions. Eli Lilly pays for nearly half of that.

The first generic versions of Mounjaro are expected to enter the market in December next year. That is more likely to have a negative impact on our national finances than Aliens landing from outer space or Nuclear War etc.

 

[Purple]

How we spend these taxes is a separate argument and building a sovereign wealth fund does of course have merit.

I don't think a "what if, overnight" is a rational way to plan and budget for anything.

How we spend the taxes is fundamentally tied to the uncertainty about future revenues from Multinationals.

If we spend money we have on capital items such as infrastructure that's a good thing. It is an investment in the country and there is a societal and an economic gain. If we commit to long term pay increases which can only remain sustainable as long as we keep getting those very high revenues from Multinationals then that is a problem.

In principle our current budget should not exceed the taxes we raise from economic activity which takes part in this State. It should be constrained using the same sort of calculations we use to calculate Modified GNI. All additional income should be saved, used to pay down any high interest debt or allocated to our Capital Budget.

 

[RainyDayFund]

I don't think a "what if, overnight" is a rational way to plan and budget for anything.

Fail to plan, plan to fail. Prudent planning for black swan events is vital because these rare, unpredictable occurrences carry catastrophic consequences that break standard risk models. That is very different to confidently expecting these tail-risks.

It is true that expecting a plan to account for every conceivable tail-risk event leads to over-hedging, which can drain capital and render daily operations or budgeting inefficient. But that isn't what's at stake here. Rational budgeting focuses on probably risks *while maintaining a general buffer for uncertainty*.

Highly unlikely that such a scenario will happen overnight.

By what criteria? If evidence of the past, then why do all my investment statements say prior returns are not evidence of future expected returns? I'm not say don't use baseline historical data - that data is the best we got, but at least add in some reasonable degree of volatility!

And what is overnight? Literally overnight? Or 3 months? 6 months? Calibrate duration to the pace at which our civil service and political class moves and reacts.

If we plan just based on what we know right now, why do financial advisors recommend emergency funds/sinking funds?

As a nation, we've had a good run of luck at the slot machine of corporate tax arbitration, but we've increased our spending floor to assume that luck continues indefinitely.

A rainy day fund helps ensure that if the proverbial hits the fan, you at least have cover. Even if you don't think the spray is coming because you can't see the proverbial or the fan, you'd still be glad of the cover if it ever is needed!

 

[Sister Sara]

If we plan just based on what we know right now

Not just on what we know right now, but on what we can reasonably expect to be in the forseeable future. A rainy day fund is a good idea for that black swan event - unless the black swan event empties out your rainy day fund for purposes other than what was intended.

I recall we had a National Pension Reserve Fund to cover future liabilities on pension costs. That is, until we hadnt anymore and that fund was used for other purposes.

I don't know what the future holds but all I'm asking is there any reason of a substantive nature (not notional whims like global population not wanting to buy iphones anymore) that indicates that the arrangements US corporations have for booking a significant portion of their profits in Ireland is going to change anytime soon?

The closure of the double-Irish didnt derail the arrangements
The Apple Tax ruling did not derail the arrangements.

In consideration of the long-term relationships and investments that some of the wealthiest companies in the world have established in Ireland, and in the absence of any identifiable headwinds to suggest otherwise, such as a change in US corporate sentiment, EU law, US law, is the basis upon which we should manage and plan our public finances.

Managing those finances with a greater emphasis on prudence - building sovereign wealth, paying down debt etc are all reasonable propositions in the absence of certainty.

My inkling is that there is a greater level of certainty that US corporations will continue to book profits (of varying amounts) in Ireland in Government/IDA/US Chamber of Commerce circles than there is in IFAC and RTE Business circles.

I could of course be completely wrong, but that is my impression based on what is actually occurring and not on "what if, overnight...(insert black swan event)".

 

[Sister Sara]

If we spend money we have on capital items such as infrastructure that's a good thing.

You do realise that increasing capital expenditures invariably requires an increase in current expenditures?

You can't have it both ways - increase capital expenditure good/ increase current expenditure bad.

 

[Purple]

You do realise that increasing capital expenditures invariably requires an increase in current expenditures?

How so? A new road, a new train line, etc don't require additional current expenditure. A replacement hospital should reduce current expenditure. A replacement school doesn't increase current expenditure. A new Port or other such piece of infrastructure may result in a small amount of increased current expenditure but the uplift in the wealth creating sectors of the economy would more than offset that increase.

You can't have it both ways -

Yes, you can.

increase capital expenditure good/ increase current expenditure bad.

Capital expenditure is once off spending and can be funded by windfall taxes without causing much inflation. If they make the States infrastructure more efficient then they may reduce inflation.
Current expenditure are recurring and should be funded though recurring taxes which are reasonably reliable and controllable by the exchequer.

 

[Sister Sara]

How so? A new road, a new train line, etc don't require additional current expenditure. A replacement hospital should reduce current expenditure. A replacement school doesn't increase current expenditure.

Well if you are talking in micro-terms maybe, but we are talking about government capital expenditures increasing in €bn's then invariably current expenditures will rise in servicing, maintaining, training, administration etc. Large capital expenditures will place demands on existing capacity creating employment, inward migration, etc.
More construction sites will invariably lead to more work-related construction injuries.

A 150yr old hospital being replaced will not be a like-for-like replacement, what would be the point? The replacement hospital, school, will invariably provide for modern services that were a pipe-dream a generation ago. Specialised units, equipment, etc with the necessary trained personnel to utilise them.

When I went to school there was one music room with a piano and 20 tin-whistles.
My kids school have facilities and equipment for a full orchestra.

In principle our current budget should not exceed the taxes we raise from economic activity which takes part in this State.

Just on that, a company like Ryanair reports €bn euro profits most years. It is a registered in Ireland so I assume it books its profits in Ireland?

Its Irish operations would be relatively tiny to its overall activity across Europe - should we exclude these windfall taxes from Ryanair also for activities that occur outside Ireland?

 

[Purple]

Well if you are talking in micro-terms maybe, but we are talking about government capital expenditures increasing in €bn's then invariably current expenditures will rise in servicing, maintaining, training, administration etc. Large capital expenditures will place demands on existing capacity creating employment, inward migration, etc.
More construction sites will invariably lead to more work-related construction injuries.

Yes, but the increase in construction activity will last only as long as the project. Are you really trying to suggest that Capital and Current expenditure have the same economic impact?

A 150yr old hospital being replaced will not be a like-for-like replacement, what would be the point?

Easier to run, safer, cheaper to run and capable of delivering better services with the same resources. Otherwise what's the point? The capital cost of building a hospital accounts for around 5% of it's overall lifetime cost. The National Children's Hospital will be far cheaper to run, on a like for like basis, than the hospital it replaces.

The replacement hospital, school, will invariably provide for modern services that were a pipe-dream a generation ago. Specialised units, equipment, etc with the necessary trained personnel to utilise them.

Those additional resources are part of current budget costs and should only be provided if the GNI* based tax revenues can fund them.

When I went to school there was one music room with a piano and 20 tin-whistles.

Luxury! back in my day we had a few boxes, broom handles and lengths of elastic. (actually there was an old piano in the Hall but no music room).

My kids school have facilities and equipment for a full orchestra.

Mine don't. My step kids go to a DEIS School and they have facilities that would put any private school to shame. The building of the school was capital expenditure. The running of the school, and the ridiculously low pupil teacher ratio, is governed by the money available in the current budget.

Just on that, a company like Ryanair reports €bn euro profits most years. It is a registered in Ireland so I assume it books its profits in Ireland?

Its Irish operations would be relatively tiny to its overall activity across Europe - should we exclude these windfall taxes from Ryanair also for activities that occur outside Ireland?

Another false equivalence. Ryanair could choose to relocate to another country but it is a trading company which doesn't and can't book profits based on intellectual property values. It therefore has to pay some tax in each of the countries in which it operates but most of it's tax is paid in Ireland. It also pays less than 4% of the tax Eli Lilly pays here.

Apple has a gross margin of 60% on an iPhone. It can choose to book that profit wherever it likes , or whatever proportion of it that it calls profit.
Eli Lilly can make aa pill for €0.05 and sell it for €80 after spending €2 billion developing it. It can choose to book that gross margin wherever it likes.

 

[Sister Sara]

Are you really trying to suggest that Capital and Current expenditure have the same economic impact?

No of course not. I'm saying that at the scale of increases in capital expenditure that our government is budgeting for it is inevitable that current expenditures will increase also. This is not hard to understand.

They may, should rather, result in greater outputs and outcomes with first class facilities and services and in turn provide greater bang for our buck, but the base € cost is to rise. If we increase capacity which we should in a growing population, if we improve standards which we should in a wealthy economy it costs more by € accounting.
Who knows, along with being reknowed for tin-whistle players in pubs we may one day punch above our weight in the orchestral field of music.

Luxury! back in my day we had a few boxes, broom handles and lengths of elastic. (actually there was an old piano in the Hall but no music room).

lol! That was funny, I'm tempted to follow in Monty Phyton mode.

Another false equivalence.

Its a genuine question and I will accept the IP point.

Nevertheless, I'd imagine its combined activities outside of Ireland dwarf its activities inside of Ireland yet

most of it's tax is paid in Ireland

so it would appear to me that the principle that our current budget should not exceed the taxes we raise from economic activity which takes part in this State, is not actually a principle at all?