Buoyant tax returns paper over lingering pressures

Some difficult decisions await incoming government

There is no real cause of alarm in that figure: the collection of €4.16 billion in VAT was still ahead of the opening four months of 2015. Although domestic demand drove the most recent phase of recovery, the VAT figures shows that consumers are spending somewhat less than anticipated even after an income tax cut in January.

There is no real cause of alarm in that figure: the collection of €4.16 billion in VAT was still ahead of the opening four months of 2015. Although domestic demand drove the most recent phase of recovery, the VAT figures shows that consumers are spending somewhat less than anticipated even after an income tax cut in January.

 

New data illustrates the scale of the challenge awaiting the incoming government, whenever it takes power .

Tax returns are up and unemployment is down but the headline figures obscure lingering pressures in the recovering economy. This is to say nothing of uncosted spending promises in the Fine Gael-Fianna Fáil deal, a package which is likely to be amended with yet more promises to Independents.

In the round, an overall tax take in excess of €14 billion is €475 million more than forecast for this stage at the outset of the year. Income tax is right on target, notwithstanding some one-off payments in April. While the figures show that the State continues to derive an income boost from corporate tax and excise duties,VAT collections were behind target by €164 million in four months.

There is no real cause of alarm in that figure: the collection of €4.16 billion in VAT was still ahead of the opening four months of 2015. Although domestic demand drove the most recent phase of recovery, the VAT figures shows that consumers are spending somewhat less than anticipated even after an income tax cut in January.

Turmoil

Any speculation as to what lies behind the underperformance is just that. Still, a prolonged bout of turmoil on global markets was followed in short order by news of incipient threats from the looming Brexit referendum. Add local political stasis into the equation and it may well be that consumers are holding off just a little. But this assessment must also take account of surging car sales – up 10 per cent in April, and one of the prime factors behind a €204 million surge in excise collections.

At this point it cannot come as any surprise that the State continues to reap the benefit of unexpected corporate tax increases, 70 per cent ahead of target in the first four months. This serves to underscore the point that corporate tax is a volatile revenue source, with potential for surprise on the upside or downside.

Spending discipline was largely maintained in the first four months. But that is in the past. With a new government on the way, the real spending test looms when promises made in political backrooms are put to the test in real time.

Health spending is also ahead of target, necessitating some form of leeway from stringent fiscal rules to avoid running foul of scrutineers in Brussels. It hardly needs to be said but this is sufficient to demonstrate that revenue collection in excess of target presents only a partial picture.

Unemployment

Then there is the unemployment data, which shows the jobless rate in April fell to 8.4 per cent from 9.7 per cent one year previously and 11.7 per cent in 2014. Impressive, yes. Yet the top line figures mask a far higher youth jobless rate, for people in the 15-24 age bracket.

This came down appreciably April to 18 per cent, from 19.1 per cent March. It follows, however, that people under 25 are still more than twice as likely to be unemployed than the older cohort.

Making further inroads on that front marks a fundamental challenge for the new administration. The same goes for the severe housing dearth, long health waiting lists and high costs for childcare, insurance and other key services. After all the talk and posturing over water, these questions will present a severe test to the minority government. A solid set of tax returns for April marks but the opening position.

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