Fiscal Windfalls: A Model-Based Analysis

Thomas Conefrey, Gerard O'Reilly and Graeme Walsh

No 3/EL/19, Economic Letters from Central Bank of Ireland

Abstract: Since 2015, the public finances have been boosted by exceptionally strong growth in corporation tax and sizeable unexpected savings on national debt interest payments. At the same time, the economy has experienced a phase of strong economic growth. In this Economic Letter, we examine some of the macroeconomic and fiscal implications of alternative uses of fiscal windfalls, conditional on the state of the economy. Saving revenue windfalls when the economy is operating at full capacity would strengthen the public finances while reducing the risk of fiscal policy amplifying overheating pressures. In the event of a future downturn, larger fiscal buffers could be used to avoid the need for austerity. Our results suggest that this could substantially reduce the loss of employment and output compared to the case where fiscal policy is tightened in the downturn.

Date: 2019-04
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