Had the budget this year been at its normal time of early October there would have been even greater pressure to spend more. The latest tax returns for September show the annual surplus of tax over spending has grown to €7.9 billion from €6.3 billion at the end of August. While this will fall sharply in the months ahead as once-off household supports are paid out, the budget day forecasts for tax and the size of the annual budget surplus already look on course to be beaten. In turn this will knock on to the 2023 figures. If the Government needs to do more next year to respond to the energy crisis then it should have the resources to do so.
Tax returns are backward looking economic indicators, but they are bang up to date. And they show that the profitability of the big corporate taxpayers remains strong, as does the jobs market. Consumers may be nervous, but for now spending is holding up.
Corporation tax payments of €2 billion during the month were twice the level of the same month last year, and for the year as a whole this tax is now growing by over 70 per cent, an extraordinary jump. The big payment month of November will tell the story, but the budget target of €21 billion for corporate taxes, announced just last week, already looks likely to be beaten. This is based on strong profitability – though the Department of Finance points out that payments are largely based on 2021 profits which may not be repeated this year.
However, the running out of tax allowances which have allowed companies to shelter most of the income from the major intellectual property assets relocated to Ireland from 2015 on could act in the other direction, boosting returns. The difficulty for the Government is that this tax heading is increasingly important but also remains unpredictable. Pharma company profitability remains strong, but it is more of a mixed picture in the tech sector, where lower consumer spending is having an impact on some big players.
Income tax receipts are also strong, running 16 per cent ahead of last year. Peter Vale, tax partner at Grant Thornton, says that what will arguably please the Government most from the figures is that despite evidence of a slowdown in hiring in the technology sector, income tax remains strong, up 15 per cent on 2021. It remains to be seen whether the higher paid jobs responsible for the vast bulk of income tax payments can be largely retained through the energy crisis, as they were during Covid-19, supporting income tax payments.
VAT receipts are ahead of 2021 by 23 per cent. While the lockdowns last year affect the annual comparison, VAT receipts remain well ahead of pre-pandemic levels. This is one to watch in the months ahead given weak consumer confidence and the squeeze on spending power from the energy crisis and higher interest rates. On the flip side, inflation and higher prices do boost VAT receipts.
For now the exchequer has enough cash to support households through the winter and keep the budget in surplus, thus giving options for next year. Some €2 billion is being put aside this year in a national reserve fund, with a plan for another €4 billion planned for next year. The idea is that this will help in years ahead if tax receipts do weaken. It is a sensible idea, but it remains to be seen what pressures emerge in 2023.
The figures allow Minister for Finance Paschal Donohoe to continue his strategy of beating the budget targets each year and having an exchequer outlook which looks manageable and, crucially, is not out of line with other EU countries. The obvious dangers of being in the spotlight with a questionable strategy are clearly illustrated by what is happening in the UK, or what happened here during the financial crash.