GLOBAL IMPACT ON IRISH TAX REVENUES NOT APPARENT IN JULY - THANKFULLY
In the first 7 months of the year, tax revenue buoyancy remains the distinctive feature of the Irish public finances.
Budget 2023 will be presented on September 27th and so the end July Exchequer returns, published today, will be the second last set of monthly data available before the Minister for Finance and his counterpart in the Department of Public Expenditure and Reform stand up to deliver what will be called a ‘cost-of-living’ budget. The good news for both ministers is that tax revenue buoyancy remains the key characteristics of the public finances.
In the year to the end of July, the Exchequer ran a surplus of €5 billion, which compares to a deficit of €5.7 billion in the same period in 2021. The turnaround of €10.7 billion is due to ongoing strong growth in tax revenues and reduced current expenditure as the Covid-19 supports are being phased out.
· Overall tax revenues totalled €43.5 billion which is 23.5 per cent or €8.3 billion higher than the equivalent period in 2021.
· Corporation tax receipts in the first 7 months totalled €9 billion, which is €3.1 billion or 51.2 per cent higher than last year. While there are some timing issues here, it mainly reflects the strong profitability of many of the multi-nationals operating in Ireland. Corporation taxes accounted for 20.7 per cent of tax revenues in the first 7 months of the year. When compared to the first 7 months of 2019, corporation tax receipts in 2022 are 95.4 per cent higher.
· Income tax came in at €16.7 billion, which is 17.1 per cent or €2.4 billion ahead of 2021. As repeatedly mentioned in this blog, 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 increasingly 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. Income tax accounted for 38.5 per cent of total tax revenues in the first 7 months of the year. In the first 7 months of 2022, income tax receipts are 37 per cent higher than the equivalent period in 2019.
· VAT receipts totalled €11.9 billion, which is up by 22.8 per cent or €2.2 billion on the same period in 2021. This reflects the ongoing improvement in consumer spending, although the year-on-year growth rate is exaggerated by the restrictions in place a year ago. However, when compared to the first 7 months of 2019, the VAT take is still up by 21.9 per cent, or €2.1 billion.
In total, Income tax, corporation tax and VAT accounted for 86.5 per cent of tax revenues in the first 7 months of the year. This goes to show that messing around with the other tax headings will not make a substantial economic difference. Income tax, corporation tax and VAT are really where the meaningful focus needs to be, if tax changes are to be implemented in an economically efficient way.
Budget 2023 will be presented against a very difficult and uncertain backdrop. The global economy is on a knife-edge and recessionary conditions are certainly possible and most likely probable over the coming months, particularly in the US and Euro Zone; central banks are increasing interest rates aggressively in an attempt to bring spiralling inflation under control, regardless of the consequences for economic growth; financial markets are very nervous and volatile; commodity prices are still at elevated levels; and the global geo-political background does not inspire confidence.
The good news for Ireland, for the moment at least, is that there is only limited evidence that the poor global backdrop is impacting on the Irish economy. Tax collection in the month of July is showing no signs of being adversely affected. Income tax in July 2022 is 18.7 per cent higher than a year earlier; VAT is 12.9 per cent higher and Corporation tax is 7.6 per cent higher. Overall tax revenues are 15.3 per cent higher than July 2021.
It seems inevitable that Ireland’s economic performance, and tax revenues possibly, will be adversely affected by global economic and financial developments over the coming months, but for the moment the situation looks ok.
I love the Pod. Could you discuss why Ireland is likely to go the populist route by voting SF in the next election? It appears that housing affordability is a major problem, along with investment funds buying up housing stock for long term rentals in a country where property ownership is deeply ingrained. I am no fan of SF and the economy may be going gangbusters. However young people want houses, their parents want them to have houses. Both sets of people vote.
When you have most mainstream media beating the SF leftist drum to spend, spend, spend, it must be very hard to stand firm and say we are locking away at least some of our windfall gains into a rainy day fund or to invest for future pension liabilities. But this is what the Government should do. Stand tall, state the case for even a small bit of prudence, and do the right thing instead of the leftist populist thing.