Government still in financial sweet spot but spending pressures mounting

Despite a massive outlay on Covid, the Government remains in something of a sweet spot financially. Exchequer returns for the first nine months of the year show tax receipts are rebounding as the economy reopens while the corporate tax boom, the one we’ve had for several years, continues.

The latest data from the Department of Finance show VAT has generated €12.6 billion so far this year, nearly €900 million more than expected. Most of the additional receipts from the sales tax have flowed in since May and the lifting of the lockdown. It’s the strongest sign yet of a resurgence in economic activity.

The Government’s budgetary position has also been nourished by corporation tax, which generated just over €8 billion for the nine-month period, €1 billion more than anticipated. It’s likely to hit another record level this year.

Budget 2022

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While income tax generated less than expected in September, the largest component of exchequer revenue has held up remarkably well during the pandemic and remains 1 per cent ahead of profile for the year and almost 20 per cent up on this time last year, though year-on-year comparisons are somewhat bogus given the pandemic.

The faster-than-expected recovery in spending and consumption and corporate profitability is pushing more people back to work, which will ultimately result in further savings in terms of less spending on wage supports and unemployment benefits. And, to cap it off, Ireland’s debt servicing costs – put at €3.4 billion for the year to September – remain low considering the size of the State’s debt (€240 billion) courtesy of historically low interest rates.

However, there’s a temporary feel to this state of affairs. For one, the surge in VAT, aided by excess savings, is part of a temporary Covid unwind while the corporation tax bonanza is unlikely to persist with global tax reforms liable to wipe up to 20 per cent of the State’s business tax base away.

Above all, demands on the public purse from age-related spending and infrastructural spending related to climate change, housing and transport are mounting and are likely to make the next period of budgetary management extremely challenging.

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