2022 IRISH EXCHEQUER RETURNS

Department of Finance justifiably cautious on corporation tax revenue buoyancy

Ireland continued to perform as a mean, lean, green tax generating machine in 2022. The end-December Exchequer returns show that an Exchequer surplus of €5 billion was delivered in 2022, compared to a deficit of €7.4 billion in 2021. This turnaround of €12.4 billion is due to buoyant tax revenues and the decline in Covid-related public expenditure.

For the full year:

·       Overall tax revenues totalled €83.1 billion which is 21.5 per cent or €14.7 billion higher than 2021. This is the highest level of tax revenues ever collected.

·       Corporation tax receipts totalled €22.6 billion, which is €7.3 billion or 47.8 per cent higher than 2021. This buoyancy mainly reflects the strong profitability of many of the multi-nationals operating in Ireland. Corporation taxes accounted for 27.2 per cent of total tax revenues in 2022 and it has overtaken VAT as the second largest tax generator, behind Income tax.

·       Income tax came in at €30.7 billion, which is 15.2 per cent or €4.1 billion ahead of 2021. The strength of income tax receipts reflects the very progressive nature of the Irish income tax system, and the high quality of employment that is being consistently created in the economy. It is indicative of a very buoyant labour market, where retention, recruitment and increased labour costs are still significant challenges for many employers, despite the international head winds that are building steadily and the tentative signs of slower activity that we are seeing in the Irish economy. Income tax accounted for 37 per cent of total tax revenues in 2022. This is down from recent peaks of around 40 per cent, but the relative decline is due to the exceptionally robust performance of corporation tax.

·       VAT receipts totalled €18.6 billion, which is up 20.5 per cent or €3.2 billion on 2021. This reflects the improvement in consumer spending. VAT accounted for 22.4 per cent of total tax revenues in 2022.

The Exchequer surplus came in at €5 billion in 2022 and this equates to an estimated General Government Surplus of €5.2 billion, equivalent to 2 per cent of Gross National Income* (GNI*). However, the Department of Finance is applying a justifiably cautious interpretation to the strong tax revenue buoyancy. The Department adjusts the Exchequer figures for its assessment of transitory corporation tax receipts and estimates that when this is done, the underlying General Government Balance (GGB*) is estimated to have been in deficit to the tune of €5.25 billion.

It is impossible to accurately estimate how much of the corporation tax revenue buoyancy is transitory or indeed how long transitory is, but it is important to recognise that a sizeable part could be transitory. The Department of Finance is obviously worried that the current government and ultimately its successor could just spend the windfall corporation taxes for political reasons, and then if a correction were to occur in corporation tax receipts, the country could be left with a significant hole in the public finances. In the run up to the 2008 crash, the government spent aggressively on the back of buoyant construction and property-related tax revenues, and when this source of revenue proved dramatically transitory, the country was left with a serious fiscal problem. The lesson is that engaging in excessive expenditure on the back of a tax base that could ultimately prove transitory is not prudent. The Department of Finance is justifiably concerned, and its concerns would not have been helped by the many pledges made by the Taoiseach since his most recent appointment to that role. He is basically committing to spending a lot of money on housing, health, child poverty and most everything else.

A note of caution is also called for from ongoing global technology pressures. Salesforce is the latest technology company to announce a plan to lay off 10 per cent of its global workforce, including some business closures, by the end of 2024. Quite simply, it hired too many employees during the covid period when revenues grew strongly. An adjustment is now necessary on the back of very changed global economic circumstances. In general, the global tech sector is likely to experience a decline in profits over the coming year and this is likely to undermine corporation tax paid in Ireland.