Back in the 1980s, Norway was having the same conversation as we’re having now, namely what to do with excess revenue from a certain sector.
Should it be saved? Should it be spent on vital national projects? Two decades earlier, in 1969, Norway had discovered the Ekofisk oil field in the North Sea, the largest subsea oil field ever discovered.
The revenue generated from the find and subsequent finds would transform Norway’s economy into one of the richest in the world. The tax and licensing of the state’s petroleum sector was designed to ensure maximum revenue flowed to the state.
Prior to the oil boom, Norway was Sweden and Denmark’s poorer neighbour (poorer in Scandinavian terms). Now its GDP (gross domestic product) per capita is about 30 per cent higher than Sweden’s and 10 per cent higher than Denmark’s. But it wasn’t all plain sailing. The influx of oil money triggered a significant imbalances within the economy, prompting fears prices and wages could be bid up at the expense of competitiveness.
Norwegian economists devised alternative measures of GDP which excluded the oil sector to better gauge the activity in the ordinary economy.
There was also concern that successive governments were dipping into the additional revenue to the shore up day-to-day spending or cancel out overspends in certain departments. Any of this sound familiar?
In the mid 1980s the Norwegian government established a commission to look at what to do with this excess oil revenue. As economist Steinar Holden explains in a recent paper, the commission concluded that the oil revenues were “not due to production in the ordinary sense, but rather should be seen as transformation of wealth, from a natural resource to financial wealth.”
“In the commission’s view, politicians would be unable to save a large amount of money in a fund abroad, because there would always be strong political pressure for increased domestic spending,” he says.
Political parties also agreed that the economy needed to be shielded from an influx of oil money to avoid overheating and wasteful public expenditure. Out of this came Norway’s Government Pension Fund Global, better known as Norway’s oil fund.
Established in 1990, it now holds approximately €1.2 trillion in assets, including 1.4 per cent of all global stocks and shares, making it the world’s largest sovereign wealth fund, and worth approximately €219,000 for every Norwegian citizen. Transfers from the fund to central government budget follow strict fiscal rules.
While the scale and source differs, there is a parallel between Norway’s oil wealth and Ireland’s multinational wealth. Both have transformed their respective economies; both have provided the exchequer with super-normal tax receipts.
The latest exchequer returns, published on Thursday, show the Government collected €4 billion in corporate tax receipts last month alone. As recently as 2014, the full-year total for corporate tax was €4.6 billion.
Cumulatively receipts are now running at €13.5 billion for the year, €2.8 billion or 25.8 per cent above profile, and are on course to hit a record €14 billion this year.
Even with the Government’s predicted €2 billion-a-year loss from the OECD-brokered changes, which include new global minimum rate of 15 per cent, the Department of Finance expects revenue from the business tax to keep on rising to €15 billion by 2025.
And receipts have tended to surprise on the upside. As the Norwegians said of their oil, corporate tax is not due to increased production in the ordinary sense, but from a transformation of wealth.
And there will always be political pressure to use it to increase domestic spending. Much of the additional revenue here appears to have vanished into the budgetary ether.
In its latest assessment of the public finances, the Irish Fiscal Advisory Council again highlighted the Government’s over-reliance on corporation tax receipts, noting receipts have become even more concentrated since the pandemic with just 10 large firms accounting for 56 per cent of all receipts last year.
“The concentration of corporation tax receipts, coupled with their ongoing volatility and vulnerability to international tax developments, is a source of serious concern,” it said.
The council recommended the Government “allocate any further excess”, including increases due to the rise in the minimum corporation tax rate to 15 per cent, to a new rainy day fund.
The previous plan for such a fund never got off the ground and was then abandoned because of Brexit and Covid.That’s why any new fund needs to be placed on a statutory footing to avoid the whims of government.
The council previously recommended the creation of a “prudence account”, which could be operated to ensure unexpected surges in corporation tax receipts are saved “so as to help to prevent long-lasting spending increases being tied to possibly temporary revenue sources.”
Calculating what constitutes excess isn’t as hard as it sounds. Anything above 5 per cent growth year on year, the current long-run growth trend of the Irish economy, could be siphoned off. It’s high time this windfall was used more strategically.