THE REMARKABLE BUOYANCY OF CORPORATION TAX
While corporation tax is dominating discourse, the rest of the tax base is also doing well.
In Budget 2023, the Government allocated €11.3 billion in once-off budgetary measures and in core budgetary measures. The absolute size of the package was huge, but did not even register on Irish bond yields. This stands in marked contrast to the debacle that followed the now long forgotten UK mini-budget, which culminated in the Prime Minister losing her job. The main reason for the two different responses was the fact that the UK would have to borrow to finance its fiscal largesse, whereas Ireland is in a position to fund it from a budget surplus on the back of buoyant tax revenues.
The good news is that the buoyancy of tax revenues has continued in October, at a remarkable pace. In the first 10 months of the year an Exchequer surplus of €7.3 billion was delivered, compared to a deficit of €7.4 billion in the same period in 2021.
In the first 10 months of 2022:
· Overall tax revenues totalled €63.9 billion which is 25.5 per cent or almost €13 billion higher than the equivalent period in 2021.
· Corporation tax receipts totalled €16.2 billion, which is €6.6 billion or 69.2 per cent higher than last year. In October alone, €2.3 billion was collected, which is €800 million higher than October 2021. This buoyancy mainly reflects the strong profitability of many of the multi-nationals operating in Ireland. Corporation taxes accounted for 25.3 per cent of tax revenues in the first 10 months of the year. It has now overtaken VAT as the second largest tax generator, behind Income tax.
· Income tax came in at €23.9 billion, which is 15.5 per cent or €3.2 billion ahead of the equivalent period in 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 37.3 per cent of total tax revenues in the first 10 months of the year.
· VAT receipts totalled €15.4 billion, which is up 22.6 per cent or €2.9 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 in the first half of 2021.
· There is something interesting going on with Capital Gains tax. In the first 10 months of the year, €665 million was collected, accounting for just over 1 per cent of total taxation collected. However, the CGT take is 45.6 per cent or €208 million higher than last year. We do not know the reasons for this buoyancy, but it could be due to investors cashing in on current asset prices, particularly property, signalling a belief that the top of the market may have been reached. Or perhaps, investors are concerned about future tax changes under an alternative government.
The Minister for Finance, Paschal Donohoe was quickly out of the blocks yesterday warning that ‘the strength of potentially volatile corporate tax receipts continued to provide an artificially positive picture of the public finances’ and that ‘it is imperative that the government does not build up permanent fiscal commitments on the basis of revenues that may prove transitory’. Sensible reflections that suggest we may have learned something from the experience of the noughties.
While the buoyancy of corporation tax is the striking feature of the Exchequer returns, it is worth noting that if corporation tax receipts are stripped out, tax revenues in the first 10 months of 2022 were still 15.4 per cent or €6.4 billion ahead of the equivalent period in 2021.
In other Irish economic news, the unemployment rate in September remained at a near-historic low of 4.3 per cent of the labour force. 116,900 people were registered as unemployed in September, down 18,500 on a year earlier.
On a more cautionary note, there are some signs of weakness becoming apparent. Although consumer confidence bounced slightly in October following the budget, consumer confidence is still close to the lows seen in the second half of 2008 and March 2020. This more cautious attitude has been reflected in a decline of 3.1 per cent in the volume of retail sales during September, representing a year-on-year decline of 7 per cent.
The Purchasing Managers Index (PMI) for manufacturing weakened modestly in October to 51.4, which is down from 64.1 in May 2021. The Purchasing Managers Index (PMI) for the services sector declined to 53.2 in October. With these diffusion indices, a reading above 50 means that more firms are expanding than contracting and, in this regard, Ireland is outperforming its EU peers. However, the trend is one of weakening, which is not terribly surprising in an environment of rising interest rates and such intense international uncertainty.