Consumer spending and inflation bolster Government’s VAT receipts

Latest exchequer numbers show the State collected €7.5bn in tax in January

Stronger-than-expected spending by consumers combined with higher prices due to inflation in the pre-Christmas period generated nearly €3.7 billion in VAT receipts for the Government in January, according to the latest exchequer returns.

Revenue from the sales tax, a strong indicator of consumer spending, was up by 18.5 per cent or €600 million on the same month last year. January is generally the strongest month of the year for VAT, as it encompasses the Christmas trading period.

Part of the growth was due to a technical factor, with €200 million of receipts withheld from December’s figures to fund potential repayments in January being returned to the exchequer, the Department of Finance said. Excluding these, VAT receipts in January were €3.5 billion, up 12 per cent or €400 million.

Another reason for the increase was inflation, with consumers spending more for the same amount of goods, which benefits VAT receipts. The figures also reflect a pick-up in core retail sales, suggesting the economy may be weathering the inflationary crisis better than expected.

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Overall, the Government collected €7.5 billion in taxes last month, which was €800 million or 12 per cent ahead of the same period last year, putting the public finances on a sound financial footing at the start of the year.

Apart from VAT, the increase was driven by strong income tax receipts, which totalled €2.8 billion for the month, up 9 per cent year on year. The department said the continuing robust trend in income tax receipts reflected “ongoing resilience in the labour market”.

Separate figures from the Central Statistics Office on Wednesday indicated that unemployment in the State remains at a near 20-year low of 4.4 per cent.

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January is not a significant month for corporation tax, with receipts of €50 million collected in the month, down by €31 million on the same period last year. The business tax generated a record €22.6 billion last year.

The figures gave rise to an exchequer surplus of €2.8 billion in January compared to a surplus of €2.2 billion in January last year, an improvement of €600 million. On a 12-month rolling basis, a more appropriate measure of the trend, the exchequer recorded a surplus of €5.6 billion.

Total expenditure for January was €6.8 billion. Of this, gross voted expenditure stood at €6.4 billion, which was €500 million ahead of the same period in 2022.

“Today’s figures show that the strong momentum in tax receipts has continued into the start of this year,” Minister for Finance Michael McGrath said.

“The strength in income tax, in particular, is a positive signal of the continued resilience in the labour market with close to a record-low unemployment rate of just 4.4 per cent recorded in January.

“Indeed, the latest incoming data, including today’s figures along with the pickup in core retail sales and consumer sentiment suggest that the downturn in the domestic economy may not be as severe as previously anticipated.

“It is crucial that we continue to use the positive momentum in the public finances to reinforce our fiscal buffers so that, in this uncertain global environment, we retain our capacity to effectively respond to future challenges.”

Tom Woods, head of tax at KPMG, said inflation is the main driver in the increase in VAT receipts as shoppers spent more and bought less.

“While the overall rate of inflation is slowing, vulnerable households and businesses continue to feel the impact of the cost-of-living crisis. The Government may, therefore, need to pause the plan to reverse some of the cost-of-living support measures,” he said.

“Given that the 2022 VAT take on utilities is up €300 million on 2021, there appears to be scope for Government to extend these supports.”

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times