CBI warns on tax base concentration, urges fiscal buffers

Central Bank of Ireland Governor Gabriel Makhlouf published a pre-budget letter to the Minister for Finance, urging a focus on long-term resilience and fiscal prudence for Budget 2027. The letter highlights risks from a narrow tax base and calls for rigorous expenditure control.

Five Pillars for Economic Resilience

Governor Makhlouf outlined five key areas to build Ireland's economic resilience: growing supply-side capacity (housing, transport, energy, water), strengthening the indigenous business sector, building fiscal buffers through prudent policy, supporting household resilience via financial markets, and developing Europe's economic infrastructure and multilateral trading rules.

The global economy faces heightened uncertainty from the Middle East conflict and Strait of Hormuz disruption, leading to surging energy prices and supply chain issues.

Modified domestic demand (MDD) growth is projected to moderate, though multinational AI-related investment will provide support.

Inflation forecasts have been revised upwards to 3.5 percent for this year and 2.9 percent in 2027.

The ECB Governing Council raised interest rates by 25 basis points, underscoring the need for a broadly neutral fiscal stance in Ireland to avoid contributing to inflationary pressures.

Concentrated Revenues, Expenditure Pressures

Ireland's revenue base shows increasing reliance on corporation tax (CT), now 23 percent of total government revenue.

This concentration is a significant vulnerability, with an estimated half of CT receipts exposed to external shocks and international tax regime shifts.

A narrow base means 10 companies generated 56 percent of all CT receipts in 2025, primarily from ICT and Pharmaceuticals.

Government expenditure growth is projected to outpace revenue, widening the underlying general government deficit.

This trajectory risks depleting fiscal buffers and adding to domestic inflationary pressures, alongside rising state borrowing costs.

Window Closing for Fiscal Reform

Ireland's historically pro-cyclical fiscal stance demands a credible and binding domestic framework to prevent future boom-bust cycles.

The current favorable economic conditions offer a temporary window of opportunity to strengthen fiscal policy and broaden the tax base.

Decisive action is now crucial to address the combined pressures of a narrow revenue base, persistent expenditure overruns, and climate and demographic challenges.