Strong exchequer numbers likely to increase clamour for tax cuts

Strong income tax, VAT and corporation tax receipts continue to boost the Government’s finances, potentially giving Minister for Finance Michael McGrath more financial scope in the upcoming budget.

Amid tensions between Fine Gael and Fianna Fáil over the possibility of tax cuts in the budget, the latest exchequer returns, published by the Department of Finance, show the Government collected €33.1 billion in taxes over the first five months of the year.

This was €3 billion or 10 per cent up on the same period last year.

The strong performance was driven by income tax, which generated €13 billion for the five-month period, up 9.4 per cent on last year. The positive trend in income tax receipts reflects the strength of the labour market with a record 2.6 million people at work in the Irish economy and unemployment at a record low of 3.8 per cent.

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VAT receipts were up by nearly 12 per cent year-on-year at €10 billion.

Inflation is the main driver of this increase in VAT receipts, with consumers spending more to buy the same amount of goods as this time last year.

Economists are warning, however, that while a temporary spike in inflation can boost VAT receipts, persistently high inflation has historically led to a decline in consumer and business spending, resulting in weaker tax revenues.

Total expenditure for the period amounted to €33.8 billion, €2 billion or 6.3 per cent above the same period in 2022 and €100 million or 0.4 per cent below profile.

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“Today’s exchequer returns present a mixed picture of our public finances. Income tax receipts remain encouraging, reflecting an economy where the unemployment rate is now at its lowest level on record, but growth in VAT receipts slowed compared to previous months,” Mr McGrath said.

“While still elevated, corporation tax receipts in the month fell on an annual basis. I have said on many occasions, this is a volatile and potentially unreliable revenue stream. This decline highlights that, while headline figures may appear positive, there are real underlying vulnerabilities in our public finances,” he said.

On a cumulative basis, corporate tax receipts amounted to €6.3 billion, €1.1 billion (20.7 per cent) higher than in the same period last year. Business tax receipts of €2.7 billion in May were marginally down on the same month last year, “reflecting higher repayments and lower profitability and highlighting the volatility inherent in this revenue stream”, the department said.

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The Government is expected to generate another record corporate tax take this year amid heightened concern over the concentration risk of having just three firms accounting for one-third of receipts.

A report by the Irish Fiscal Advisory Council (Ifac), published earlier this week, said three firms, including Apple, accounted for one-third throughout the five-year period from 2017 to 2021, amounting to €5.2 billion in 2021, equivalent to 8 per cent of total tax receipts.

The latest tax numbers gave rise to an exchequer deficit of €600 million at the end of May. This compares with a surplus of €1.4 billion in the same period last year.

The department said the difference was driven by the transfer of €4 billion to the National Reserve Fund (NRF) in February. On a 12-month rolling basis, the exchequer recorded a surplus of €3 billion.