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Exchequer returns

Exchequer returns July 2020 – Peter Vale commentary

Peter Vale Peter Vale

Most of the interest today in the latest Exchequer figures (for July 2020) was on VAT receipts.

One of the issues analysing any drop in VAT receipts is how much relates to a dip in consumer spending and how much relates to businesses availing of the debt warehousing scheme and deferring payments to a future date.

The latest VAT figures show a dip in receipts of 30% compared with the same month last year.  While this looks stark, it compares with a 35% dip in May and a 50% drop in March, the last two major VAT months.  The drop today is also in line with the Department’s own revised projections, in fact slightly better than anticipated.

Given that there was evidence of an upturn in consumer spending in the last couple of months, it is difficult to gauge how much of today’s drop in VAT receipts reflects declining consumer spending and how much reflects businesses preserving cashflow and electing to defer payments of VAT due.

The income tax figures for July are positive.  Although down 8% on the July 2019 equivalent, this compares with a 21% drop in June.  With more people re-entering employment, the income tax figures are trending in the right direction and ahead of the Department’s revised COVID19 forecasts.

The combined VAT and income tax figure for 2020 will almost certainly lag significantly behind 2019 by year end.  However the deficit will be less than originally expected, unless any further spikes in cases means a return to the more significant lockdown measures.

An unknown factor is what impact the reduction in government support through the wage subsidy schemes will have on consumer spending and related VAT receipts.  If employment does not continue to increase, the reduced government supports will impact on spending later in the year, in particular during the key Christmas period.

A positive figure in the year to date figures has been corporation tax receipts, with the large surplus expected to at least partially shelter any deficits elsewhere.  The June figures were key and suggest that strong returns will continue for the rest of the year. While there was a drop in corporation tax receipts in July, this is a “non month” for corporation tax and not much can be read into this.

Longer term, the Apple case ruling last month will give foreign investors more confidence in the stability of Ireland’s tax regime.  Given the massive contribution by multinationals to Ireland’s tax base, across multiple tax heads, this is critical.

At the moment, the biggest risk to Ireland is expected further attempts by the EU to challenge aspects of our tax regime, including efforts to remove the ability of countries to veto proposed EU tax changes.  Any such attempts will likely be strongly resisted by smaller countries in particular, including Ireland.

Overall, seven months into the year, tax receipts are only 2.5% behind the same period in 2019.   While considerable uncertainty regarding the future remains, this is a remarkable achievement given the COVID19 backdrop and largely driven by large corporation tax surpluses, a strong start to the year across all taxes (pre COVID) and more resilient than expected income tax receipts during COVID. 

At this point there remains good reason for optimism that full year tax receipts will be considerably ahead of the Department’s revised COVID forecasts.