The latest Exchequer figures continue to show the impact of COVID-19 on the public finances.
In March we saw VAT receipts drop almost 50% year on year. Today we saw April income tax receipts hit, with a 6% drop compared with the same month last year.
As noted by the Department, we haven’t yet seen the impact of COVID-19 on income tax payments as April’s figures reflect March payrolls, ie before the full impact of COVID-19 was felt. Notwithstanding this, it is surprising that the drop in income tax receipts is as modest given that many businesses chose to defer income tax payments.
VAT receipts will continue to be hit hard by a combination a reduction in disposable income, fewer opportunities to spend and the deferral of VAT payments by businesses. While April is a “non-month” for VAT, excise duties fell 19% over the same period last year, blamed by the Department on a fall in excise paid on oils and Vehicle Registration Tax.
Going forward, income tax will suffer as unemployment levels approach 20% and many businesses defer the payment of income tax. While there may be some recovery before year end, both VAT and income tax will finish the year substantially behind the original target.
Overall, tax receipts in April were 8% lower than April 2019, with cumulative figures for the year to date just 1% lower than 2019 given the strong start to 2020 prior to the COVID-19 impact.
By year end, the Minister expects full year tax receipts to be 16% behind last year. This is based on the assumption that corporation tax will fall by a relatively modest 6.5% this year. Given the significant impact of COVID-19 on companies’ profitability and notwithstanding the good start to the year, it is quite possible that the fall in corporation tax receipts this year will be much higher, with a pick up in receipts not expected until late 2021. One thing for certain is that corporation tax receipts will not provide a buffer against weaker receipts elsewhere, as has been the case in the past.
The current Department projections show income tax and VAT falling circa 20% this year, with half of this drop clawed back next year. Corporation tax receipts are expected to return to 2019 levels in 2021. Predicting the timing and nature of the recovery is incredibly difficult and dependent on multiple factors, including in particular the production of a vaccine or improved virus treatments. Given our open economy, how other countries are faring will have a big bearing on our recovery.
The Minister has indicated that tax rises are not anticipated in the next Budget, as to raise taxes would stifle recovery. However it is possible that certain tax reliefs will be examined closely, although nothing has been announced in this respect. Longer term, subject to the nature of the recovery and the state of the public finances, tax raising measures are of course a possibility. A broadening of the tax base or increases in property tax have been suggested in the past, but both are likely to be politically challenging.
Overall, the figures today were sobering, although well flagged. Next month will be critical as it will give a first signal as to where corporation tax receipts are heading for the year. Bad news on this front will also feed into 2021 receipts, with substantial losses reducing tax payments and increasing the quantum of tax refunds.