BUMPER TAX REVENUES PAVE THE WAY FOR A STRONG 2022
By Jim Power
One of the more noteworthy positive features of a generally positive year for the Irish economy was the strength of tax revenues, which in turn delivered a much lower borrowing requirement than envisaged at the beginning of the year.
For 2021 as a whole, the Exchequer borrowing requirement (EBR) came in at €7.37 billion, which is down from €12.31 billion in 2020. The EBR is a narrower definition of the public finance situation than the general government financial position, which includes a broader definition of government. The general government financial outturn will not be available for some time, but the Exchequer financial outturn does paint a good picture of the overall state of the public finances. It is a strong position given the exceptional circumstances that have prevailed over the past couple of years.
The key feature of the public finances in 2021 was the buoyancy of tax revenues.
· Overall tax revues totalled €68.4 billion which is a record high, and is 19.7 per cent higher than 2020, equivalent to €11.2 billion.
· Income tax, corporation tax and VAT accounted for 84 per cent of tax revenues and all three performed very strongly in 2021.
· Income tax came in at €22.7 billion, which is 17.4 per cent or €4 billion ahead of 2020.
· Corporation tax came in at a record high of €15.3 billion, which is 29.5 per cent or €3.5 billion ahead of 2020. Corporation tax came in €3.3 billion higher than forecast by the Department of Finance at the beginning of 2021.
· VAT came in at €15.4 billion, which is 24.3 per cent or €3 billion ahead of 2020.
TABLE 1: TAX REVENUES 2021
· Corporation tax has increased from 14.7 per cent of total tax revenues in 2006 to 22.4 per cent in 2021. This reflects the strong economic and financial contribution that foreign-owned multinationals are making to the Irish economy.
· VAT has fallen from 29.5 per cent in 2006 to 22.6 per cent in 2021.
· Income tax has increased from 27.2 per cent of the total tax take in 2006 to 39 per cent in 2021. It is worth noting that employment levels in both comparator years are not that that dissimilar; employment averaged 2.13 million in 2006 and an estimated 2.35 million in 2021. Income tax is becoming an increasingly important component of tax revenues, which reflects amongst other things, the very progressive nature of the Irish income tax system, and the high quality of employment being created in the Irish economy.
In 2021, gross voted government current spending totalled €77.6 billion, which was 2.7 per cent higher than in 2020. Gross voted current spending on health at €20.7 billion increased by 4.8 per cent or €950 million, and gross current expenditure on social protection totalled €30.3 billion, and was 0.6 per cent lower than in 2020. In 2021, gross voted current spending on health and social protection accounted for 65.7 per cent of total gross voted current expenditure.
Figure 1 shows the trend in tax revenues since 1984. The key thing that stands out is the sharp contraction in tax revenues after 2007, when construction-related tax revenues collapsed in line with the property and construction sector. Since 2012, tax revenues have expanded at a dramatic pace.
Figure 2 shows the trend in gross voted government expenditure since 1994. There was a sharp contraction in expenditure during the period of austerity post-2007, but there has been a strong expansion in current expenditure since Covid commenced.
The fiscal crisis from 2007 onwards was caused by a collapse in tax revenues. Since March 2020 in marked contrast, the deterioration in the public finances was caused by a sharp increase in Covid-related public expenditure on health and social protection, rather than a shock to tax revenues. (Figure 2).
In actual fact, tax revenue buoyancy has been a marked feature of the past couple of years, and goes to show the importance of maintaining a functioning economy, which in turn generates the tax revenues necessary to fund public expenditure. It is impossible to have a functioning society without a functioning economy. Growth is the way in which the current fiscal imbalances will be corrected, rather than through cuts in public expenditure.
While it is foolish at this very early stage of the year to try to project tax revenues out over the remainder of the year, it seems clear, unless we see some unexpected shock, that tax revenues in 2022 could once again be driven to record highs by buoyancy of income tax, corporation tax and VAT.