Ireland "artificially inflated" its budget surplus in the final years of the Celtic Tiger with windfall gains from stamp duty and VAT, two staff members from the Central Bank have concluded in a new paper. In the period between 2002 and 2009 there was a sizeable gap between what was collected in VAT and stamp duty and what was warranted by the fundamentals of the economy, the researchers concluded.
The inflated state of the Irish balance sheet was at its worst in 2006 when these so-called windfall components reached €2.4bn or 1.1% of GDP.
In 2007 the windfall gains were down to €2bn, but this still meant the "actual general government balance in those years was artificially inflated", said the authors of the paper. The researchers said this painted a "misleadingly optimistic picture of the sustainability of Irish public finances".
The paper looked at 2006 and estimated that nearly €1.5bn of total VAT receipts were a "revenue windfall", while the figure in 2007 was approximately €1.3bn. In terms of stamp-duty returns, revenue windfalls in 2006 came to almost €1bn.
The paper was written by Diarmaid Addison-Smyth and Kieran McQuinn, who said their views were not necessarily those of the Central Bank or the Financial Services Authority of Ireland.
"The Celtic Tiger's buoyant days of budgetary surpluses have quickly given way to deficits of a substantial nature,'' they said.
In terms of what policy steps should be taken in future, the researchers said assets taxes could be volatile and levying taxes in these areas needed to be done in a prudent manner. "Empirical evidence shows that the volatility of government revenue is typically higher than both expenditure and the economic cycle itself."
They said any windfall gains in future should be used to pay down deficits as opposed to increasing spending.
"At a minimum, during periods in which the receipts from such taxes are increasing rapidly, they should be saved for periods in which they underperform... Expenditure programmes and budgetary policy should be linked more closely to developments in more stable tax categories."
The paper also looked at what the sustainable level of house building is for Ireland.
The Department of Finance estimates it is between 60,000 and 70,000 houses per annum. "We adopt a more cautious estimate and suggest the present structural level of housing supply is in the region of 45,000 units per annum,'' the authors said.