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Ireland to invest corporate tax windfall in new sovereign wealth funds

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Ireland is set to invest more than half of its coming corporation tax windfall in two new sovereign wealth funds, providing revenue for infrastructure projects and future economic challenges.

Finance minister Michael McGrath said on Tuesday that the long-awaited funds would together receive €6.3bn a year from the estimated annual €10bn to €12bn of corporate tax paid by global tech and pharmaceuticals companies. However, the government believes the windfall could prove temporary.

“We have a window of opportunity we must grasp,” McGrath said, calling the funds “a step-change in how we plan for the future”.

Corporate tax receipts have more than tripled since 2015 and are forecast to hit €23.6bn this year and €24.5bn in 2024.

But the government says it must be cautious because the revenues, generated by companies that have their European headquarters or large operations in Ireland to take advantage of the country’s low tax rate, are volatile and may suddenly dry up.

The planned funds cement a remarkable turnaround for Ireland’s economy, which needed a €67.5bn bailout from the IMF and EU in 2010 after an economic and banking crash.

Ireland’s corporate tax rate, which at 12.5 per cent is one of the lowest in the world, has been an important driver of the country’s recent economic strength, generating growth and bumper corporate tax receipts. Under a global deal, this will be raised to 15 per cent from January.

As a result of the corporate tax bonanza, the government is now expecting budget surpluses totalling €46bn between 2023 and 2026.

It will pay 0.8 per cent of gross domestic product — about €4.3bn — into the new Future Ireland Fund every year from 2024 to 2035. Next year, it will also pay in an extra €4.1bn from an existing rainy day fund, which is being wound up.

The government expects contributions and returns from investments in international instruments to grow the Future Ireland Fund to €100bn by 2035. It can access the fund from 2040 for pensions and health spending for an ageing population, plus decarbonisation and digitisation projects.

In addition, it will invest €2bn a year in a new Infrastructure, Climate and Nature Fund between 2024 and 2030 to amass a maximum of €14bn by 2030. It will use the rest of the rainy day fund for next year’s contribution.

The ICNF is designed to ensure that Ireland, which slashed spending after its economic crash and is now suffering a chronic housing shortage and infrastructure constraints, has the cash to keep spending in a future downturn.

A quarter of the ICNF can be used in a year where there is a significant deterioration in public finances.

Up to 22.5 per cent of the ICNF can be used in any given year after 2026 to support climate and nature-related projects if the government is failing to meet its climate goals. The ICNF funds will be invested in high-return, short-term instruments.

Full details and investment criteria will be contained in legislation, which is expected to be put to the Dáil parliament by the end of October.

Much of the rest of the surpluses will be ploughed into reducing the general government debt, which Ireland expects will fall below €200bn by 2030, from €225bn at the end of 2022.

Separately on Tuesday, Portugal, which is one of the other few EU states with a budget surplus, said it would use its relatively strong fiscal position to boost household incomes by delivering an “important” income tax cut, along with improving public sector salaries and pensions.

Fernando Medina, finance minister, said the budget “responds to people’s needs” amid a cost of living and housing crisis that has left many Portuguese voters asking for the Socialist government to do more.

In its initial announcement, the government did not specify which tax levies would change in a country where the top marginal rate is 48 per cent, but it said the planned income tax cut would reduce annual revenue by €1.3bn in 2024.

The finance ministry said a teacher earning the average wage of €2,141 per month would pay €385 less in annual income tax.

The government will give public sector workers a pay rise of between 3.1 per cent and 6.8 per cent next year, while state pensions will increase by about 6.2 per cent.

Portugal is on track to record a budget surplus equal to 0.8 per cent of GDP this year and it forecast that it would shrink to 0.2 per cent of GDP in 2024. It aims to keep reducing public debt, which is set to be 103 per cent of GDP this year and is forecast to drop to 98.9 per cent next year — the first time it would be below 100 per cent since 2009.

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