Options for Strengthening Ireland’s Fiscal Framework

IMF Working Papers, July 25, 2025

Source details

Ireland’s reliance on corporate income tax (CIT) receipts from multinational enterprises, concentrated in a small number of companies, presents significant risks to the budget.
The uncertain nature of this revenue calls for a robust fiscal framework to safeguard public finances.
The paper proposes establishing a prudent medium-term debt anchor and an expenditure rule to guide the annual budget process.
Methodological approach: calibrate CIT shocks, simulate possible debt trajectories, and design operational multi-year expenditure ceilings calibrated to stabilize debt while accounting for the economy’s cyclical position.
Although tailored to Ireland, the methodology has broader applicability for designing effective fiscal rules.

Fiscal risk source:
- Corporate income tax (CIT) receipts from multinational enterprises are the principal source of vulnerability.
- Revenue concentration: CIT receipts are concentrated in a small number of companies.
Implication:
- The uncertain and volatile nature of CIT revenue increases downside risks to debt sustainability and fiscal plans.
Diagnostic approach:
- Calibrate CIT shocks and simulate possible debt trajectories to establish a prudent debt anchor.

Prudent medium-term debt anchor:
- Establish a debt anchor based on calibrated CIT shocks and simulated debt trajectories to reflect Ireland’s exposure to concentrated CIT volatility.
Expenditure rule:
- Introduce an expenditure rule implemented through multi-year expenditure ceilings.
- Ceilings are calibrated to stabilize debt at the anchor level while accounting for the economy’s cyclical position.
Operationalization:
- Use the expenditure ceilings as the guiding constraint for the annual budget process to translate the medium-term anchor into yearly policy.

Methodological steps:
- Calibrate shocks to CIT revenues.
- Simulate multiple debt trajectories under those shocks.
- Determine a prudent debt anchor consistent with simulated outcomes.
- Derive multi-year expenditure ceilings that stabilize debt at the anchor, conditional on cyclical position.
Applicability:
- Although the proposals are tailored to Ireland, the methodology is presented as broadly applicable for designing effective fiscal rules in other jurisdictions facing concentrated revenue risks.