Exchequer Returns

Exchequer Returns December 2018 - Peter Vale commentary

Peter Vale Peter Vale

Following today’s December exchequer figures, we now have the complete picture for 2018.   

On the tax front, there is mixed news.

On the plus side, tax figures for the year were comfortably ahead of target (2.6%) and well ahead of 2017 (8.3% year on year growth).

However the main reason for overshooting target was the huge increase in corporate tax receipts in 2018.  This was partly explained by the Department as due to one-off gains resulting from accounting changes, with a dip in corporate tax revenues expected in 2019.

Without the large corporate tax “buffer”, the concern is how we will fare in 2019 if there are dips elsewhere.  For example, excise duties and stamp duty were a combined €600m+ behind target in 2018, with this deficit cushioned by the significant corporate tax surplus.

VAT receipts were strong in 2018 but there is a concern that weak Christmas trading will result in a drop in VAT receipts in the first quarter of 2019.  How Brexit will feed into consumer confidence and spending, and resultant VAT receipts, is also uncertain.  Clearly Brexit has the capacity to hit tax revenues hard in many other areas too.

Income tax receipts continue to disappoint somewhat. While ahead of last year, the more buoyant than expected labour market hasn’t translated into a significant upsurge in income tax receipts, with no obvious explanation as to why not.

The capital tax receipts position is interesting, with a healthy increase over the 2017 figures, reflecting the increase generally in asset values. It is interesting to ponder whether the increase in receipts would be higher still if the tax rate was lower, thus incentivizing the transfer of assets to a greater extent.

Without the fallback of bumper corporate tax receipts, coupled with Brexit looming on the horizon, the position for 2019 is far from certain.  The corporate tax position itself is very dependent on returns from multinational corporations.  While these remain robust, international tax developments remain fluid.  While in our view Ireland is well positioned to continue to prosper in the new global tax environment, uncertainty remains and we have little control over how it will play out.

If there is an unexpected dip in tax revenues in 2019, the question will be how to plug the gap.  Income tax and capital gains tax rates are already high, as is our standard VAT rate (23%).  Any change to our corporate tax rate is out of the question, leaving little room for manoeuvre.  Any move to increased taxes on wealth, such as higher property taxes, probably make sense from a fiscal and economic perspective but is politically unpalatable. So our options are limited.

In summary, 2018 was a very good year on the exchequer front but there are already signs that we will struggle to replicate it in 2019