Central Bank calls on Government to widen its tax base

The Central Bank Governor has warned the Irish Government about the “vulnerability” of its narrow tax base.

In a letter to the Minister for Finance, Gabriel Makhlouf said that Ireland should widen its tax base as the fiscal outlook is “clouded by uncertainty”.

The Central Bank published its annual letter from Mr Makhlouf to Paschal Donohoe ahead of the Budget 2026.

The Governor writes to the minister each year in advance of the budget to provide analysis and comment to “support national economic policy development”.

Mr Makhlouf also called for a credible spending rule, adding that spending will need to rise by about 265 billion euros between 2025 and 2050 to fund higher age-related spending.

He said that additional public investment will be needed to meet housing and net-zero targets.

He added: “Analysis by Central Bank staff also points to vulnerability arising from the relative narrowness of the income tax and VAT bases in Ireland.

“The income tax base is highly concentrated, with 8.5% of the highest-income taxpayers in Ireland accounting for 56% of aggregate personal income tax revenue (income tax and USC).

“And the VAT base also appears relatively narrow by EU comparison, owing to both changes in the composition of household expenditure over time as well as the widespread application of reduced and zero rates to a variety of goods and services.

“The current environment clearly presents a balancing act for budgetary policy.

“The economic and fiscal outlook is clouded by uncertainty and there are considerable downside risks.

“At the same time, a key current public policy priority is the need for higher public investment to close infrastructure gaps, improve productivity and boost the economy’s long-term potential growth.”

He said that two specific areas that require significant increases in public investment in the years ahead are housing and decarbonisation.

He told the minister that the analysis carried out by the Central Bank shows that further increases in capital spending must be managed carefully.

“If the economy and labour market remain close to capacity as at present, new revenue-raising measures would help to reduce the risk of higher public spending damaging competitiveness and crowding out activity in other parts of the economy,” he added.

“If economic growth slows materially and some excess capacity emerges, then higher investment could be absorbed with a lower risk of crowding out.”

He added: “While the uncertainty related to the geoeconomic backdrop points to more muted economic growth outcomes with further downside risks, the implications for inflation are less clear-cut, with potential upside and downside risks.

“Over the near-to-medium-term, however, the central outlook for inflation in the euro area as a whole is broadly favourable, with indications suggesting that inflation will settle at around the Governing Council’s 2% medium-term target.”