Economic Letter: Fiscal Windfalls: A Model-Based Analysis

29 April 2019 Press Release

An Economic Letter by Thomas Conefrey, Gerard O’Reilly and Graeme Walsh titled “Fiscal Windfalls: A Model-Based Analysis” examines recent fiscal windfalls which have benefitted the Exchequer, using a model-based analysis.

In recent years, the Irish public finances have benefited from a surge in corporation tax revenues along with savings on national debt interest payments due to the low interest rate environment. Taken together, the unexpected revenue from corporation tax as well as the savings on debt interest spending have averaged just over €1.7 billion per annum since 2015. This research provides a model-based analysis of the economics of such fiscal windfalls.

The key findings are:

  • Using fiscal windfalls to finance an increase in government expenditure rather than running a larger surplus has a very different impact if the economy is far away from capacity limits than if there are conditions of full employment.
  • If the economy is close to full employment, an increase in government expenditure could lead to a crowding out of private sector activity. Accordingly, the net assessment of whether to spend windfall revenues should be revised once the economy hits capacity limits.
  • An alternative to spending fiscal windfalls is to save them in order to build up fiscal buffers. Our analysis points to several potential advantages of such an approach. Larger fiscal buffers would help to reduce Ireland’s high public debt and would lessen the exposure of the public finances to negative shocks.
  • A failure to run surpluses during windfall phases may limit the capacity of the government to offset negative cyclical or structural shocks by loosening fiscal policy during a future downturn. Our results indicate that if procyclical fiscal tightening can be avoided, this would help to reduce the loss of output and employment during a downturn.


  • The views presented in Economic Letters are those of the authors and do not necessarily represent the official views of the Central Bank of Ireland.
  • The analysis in this Letter was discussed in a recent speech by Governor Philip R. Lane at UCD on 16 April 2019.