International investors give Ireland the thumbs up, ignoring corporate tax warnings

Ireland as one of Europe’s safe havens for investors? Something of a milestone was hit this week when the cost to the State for raising short-term borrowings dipped below that of Germany, traditionally the euro zone’s benchmark.By Thursday morning the quotes were more or less the same for short-term, two-year German and Irish borrowings at just under 3.1 per cent. Looking at 10-year bond yields – the more traditional comparative measure – Ireland at 3.54 per cent was still a bit above Germany at 3.37 per cent. But as interest rates rise worldwide and investors focus on countries with high debts and deficits – notably France – Ireland remains in a sweet spot. The domestic debate on volatile corporate taxes and the risks ahead is not resonating in international markets.Long-term interest rates are on the rise worldwide because of fears of rising inflation and increases in central bank rates. As this has happened, the cost of borrowing for countries with higher debt levels - like the US, the UK and particularly France – have taken the biggest hit. READ MOREIreland’s borrowing costs have risen too. The National Treasury Management Agency (NTMA) recently borrowed new 10-year funds at a rate of 3.5 per cent. A year ago the rate was 2.5 per cent while back in 2022 the State was raising 10-year cash at 1.5 per cent and there were even some six-month borrowings conducted at negative interest rates. Market conditions are now a world away from that period, but Ireland is at the right end of the euro zone league and 10-year borrowing costs here compared to over 5 per cent in France, 4.6 per cent in Italy, 4.5 per cent in Belgium and 4 per cent in Spain. [ Fiscal advisers point out the flaws but Government ignores them. What’s the point of Ifac?Opens in new window ]Particular concerns surround France, with a debt-to-GDP level approaching 120 per cent, a deficit of 5.4 per cent of gross domestic product (GDP), political paralysis and riots on the street. Its 10-year bond rate has jumped by 1.3 percentage points since June, sparking fears that the European Central Bank (ECB) might need to step into the market, or that some kind of borrowing shock could lie ahead which could ripple out across the euro zone. Fears of debt pressures have left big institutions looking for safe havens. And Ireland with its low debt-to-GDP ratio and significant budget surplus is benefiting. Investors seem happy to overlook the risks from the well-discussed reliance on potentially volatile corporate tax revenues from a few big multinationals. Or perhaps in an uncertain world they reckon these dangers are sufficiently far into the future not to worry about.Why is motor insurance so expensive in Ireland?This issue is on the radar internationally. The KBRA debt agency pointed out in a recent note: “Changes in corporate profitability, investment structures or international tax arrangements could therefore have a sizeable fiscal impact, particularly given the importance of the pharmaceutical and technology sectors.”And noted US commentator Brad Setser of the Council on Foreign Relations, a long-time critic of Ireland’s tax policies, returned to the fray, saying on X in response to posts on Ireland’s low bond rates: “Sadly, winning at tax competition pays ... Ireland runs a large surplus largely because a small subset of US companies pay more tax in Dublin than in (Washington) DC.”Setser has called for changes in US tax legislation to combat this. But for now at least bond investors retain confidence in Ireland’s ability to ride out any likely fall-off in corporate taxes. [ Ireland’s national debt could hit €250bn in 2030sOpens in new window ]This is supported by strong short-term forecasts for the Irish public finances. Kevin Timoney, chief economist at Davys, argues that the Irish budget was conservative in its forecasts and that the predicted budget surplus would be higher than expected this year, leaving more leeway in 2027. He also points to the strength in tax revenues in areas other than corporation tax.Ireland’s growth story seems to be reassuring investors. “Economic growth has been about double the speed of Department of Finance budget forecasts since 2022,” Timoney said, another factor which he believes is underpinning support for Ireland’s borrowings on world markets. He also believes Ireland has significant leeway due to its financial balance sheet – including significant cash on hand – and believes it could continue to attract international confidence even if it had to borrow to fund some future State investment. In other words there is significant leeway in the figures.The Irish Fiscal Advisory Council (Ifac), the budget watchdog which has consistently warned about the outlook for the public finances, not surprisingly takes a different view. [ Budget 2027 continues extraordinary rise in State spendingOpens in new window ]“Markets are pricing today’s tax windfall, not tomorrow’s risks,” according to its chief economist, Eddie Casey. “If you strip out the corporation tax we can’t explain, the Government is heading for €20 billion deficits, with three firms paying nearly half of it and nobody knowing how long that will last.” If the corporate tax receipts fade, then “the surplus goes with them”, warns Casey. " Whether they fade depends on things Ireland doesn’t control: how a handful of tech and pharma products sell, who runs these firms, and tax policy abroad. Nobody knows how that will pan out."The debate – and the pressure on countries such as France – underlines the importance of Ireland retaining international confidence in its public finances. If something blows up in the markets – and a string of European elections next year, notably in France, will be vital – then the place to be is out of the spotlight. The Government points out that it is putting cash aside for the future in two funds. However, its own forecasts suggest that while the headline general government balance – the EU borrowing measure – will remain in strong surplus, Ireland is getting to a position where it will have to borrow if it wants to continue to put money into the two funds.[ Denying our dependence on US firms is like saying Tony Soprano worked in ‘waste management’Opens in new window ]The concept of the funds was that they would be putting away excess corporation tax receipts. But, in fact, the vast bulk of corporation tax receipts are being spent, rather than saved. And by 2028, on the Department of Finance calculations, the cash borrowing needed will be quite substantial.This is like the exchequer taking money out of one of its pockets and putting it in another. You could argue that it would be better to run down the national debt, rather than borrow to put money into two funds. Gross national debt is due to rise from €208 billion this year to €236 billion by 2029, but of course there will be increased cash assets on the other side in the two funds.The key debate is just how volatile the Irish public finances outlook is. The Department of Finance estimates that “potentially transient” corporation tax now accounts for around half of all tax from this heading – about €18.8 billion this year rising to almost €23 billion next year.[ Ireland’s reliance on multinationals extends ‘far beyond’ corporation tax, warns watchdogOpens in new window ] Its longer term forecasts in its Future Forty analysis shows that into the 2030s the Irish public finances could come under serious pressure if the windfall part of corporate tax receipts – the part not explained by activity in Ireland - gradually winds down. The budget watchdog cautions that in addition to this we need to consider other pressures on the public finances, notably from an ageing population. The debate about the extent of leeway in the public finances is crucial – and it is impossible to accurately predict what will happen with volatile corporate taxes, never mind the many other uncertainties around. For now investors are happy to bet on Ireland’s strong growth and headline public finance figures. We have seen before how quickly this can turn. But it would probably require an “event” – say a big drop in payments from one or two of the big payers – to draw attention to Ireland. The benefit of staying in the exclusive club of safe havens is huge – but whether Ireland can make the choices to allow this to happen is the question. Using the surplus to invest wisely and protect the public finances is the formula – but political pressures are in the other direction, to spend the money now.