Give Me a Crash Course In . . . the rising tax take

Tax in January and February is up nearly €500m. Car sales are great and unemployment is down. But Ireland’s debts still constrict Government finances

Revenue collected €7.2 billion from taxpayers in January and February.

Revenue collected €7.2 billion from taxpayers in January and February.

 

New figures show that tax collection is broadly on target so far this year. What does this mean?

Monthly data from the Department of Finance shows that Revenue collected €7.2 billion from taxpayers in January and February, almost €500 million more than in the same period in 2015. It suggests that the pick-up in economic activity continues. In a declining economy, when jobs are eliminated and consumers spend less, tax collection goes down.

What’s going on within these figures?

The data shows that the State is taking the benefit of surging car sales, which deliver extra vehicle registration tax. Sixty-one thousand cars have come on to the road since January. This is more than the total sold throughout 2009, the sector’s worst year in the crisis. The figures also show the State taking the benefit of increased employment, via income-tax receipts. Compared with the first two months of 2015, income-tax payments tax rose by €251 million, to €3.14 billion.

What about jobs?

Separate Live Register data this week shows that the number of people signing on in February was down by 35,400 from the same month in 2015. This reflects job creation. About 44,100 people took up work last year. The unemployment rate in February was 8.8 per cent, down from more than 15 per cent in 2012. Take note that rising employment delivers a double benefit to the exchequer: not only do income tax payments go up, but welfare payments go down.

Is there a deeper message here?

The February data is in line with a long succession of figures that reflect the recovery in tax revenues. In 2007, just before the eruption of full-blown crisis, the State collected €47.25 billion in tax. Within three years this fell to €31.75 billion, necessitating huge borrowings to maintain essential services and rescue banks. Only this year is tax revenue forecast to return to the level seen in 2007.

But voters largely rejected the outgoing Government’s recovery mantra in the election. So isn’t this news academic?

Not really. It’s certainly true that the turnaround message and “fiscal space” debate did not resonate with voters. Still, it’s only on foot of recovery in the public finances that any tax concessions or spending increases could be contemplated for the future. In the 2011 general election it was all about spending cuts and tax increases.

Any other election observations?

Well, the extent to which virtually all of the debate was predicated on the continuation of solid growth was striking. Ireland’s small, open economy is highly exposed to external forces. There is anxiety about the global economic situation. Any big setback would have an adverse impact on the Irish scene. That would bear down eventually on the exchequer.

So the crisis in the national finances isn’t over yet?

Ireland’s finances remain highly constrained, not least because the servicing of large postcrisis debts costs about €7 billion a year. After prolonged retrenchment, the pent-up clamour for improved public services inflicted a great deal of damage on the outgoing Government. Such demands are huge, but the resources to meet them are not. What’s more, national and European rules compel the State to run very tight budgets. The carve-up between day-to-day spending, tax measures and investment expenditure is not easy.

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