Covid punches €21bn hole in public purse but it could have been worse

The coronavirus crisis has left a €21 billion hole in the public finances. That’s what the latest exchequer returns tell us. They point to a budget deficit of €19 billion for 2020, which equates to a year-on-year deterioration of €21 billion on the €1.85 billion surplus generated in 2019.

It took us a decade to bring order to our public finances following the 2008 financial crash. After 10 years of austerity and penny pinching we ran budget surpluses in 2018 and 2019, but this pandemic has obliterated these fiscal niceties in the blink of an eye.

But before you cry out to the heavens in anguish, a €19 billion deficit in the context of what’s gone on globally is a positive result – the best of any euro-area country. And it is one that puts us in a strong position to maintain financial supports for workers and businesses while a vaccine is rolled out.

It equates to 5.5 per cent of gross domestic product; the euro area average is 8.8 per cent. Countries like the United Kingdom and Spain took much bigger financial hits.

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Warnings

The forecast at the time of the Government’s Stability Programme Update back in April was for a year-end budget deficit of €23 billion. And there were warnings at the time that it could balloon to €30 billion.

Ultimately, the dial went the other way and for two reasons. First, the workers most affected by restrictions have been those in low-paid sectors of the economy like hospitality and retail. Because of this they pay less income tax and therefore the hit to the exchequer has been mitigated.

Income tax receipts generated €22.7 billion last year which was just €224 million, or 1 per cent, down on 2019 – remarkably resilient in the context of a rapid and persistent spike in unemployment.

"This is largely attributable to the sector-specific nature of the shock to the economy and the progressivity of the income tax system, with the most affected sectors being those dominated by employees who were at the lower end of the wage distribution and, accordingly, were largely outside the income tax net," said the Department of Finance.

Positives

It might seem mean spirited taking a positive from an economic crisis that is hitting the most vulnerable and least well-off workers in the State, but a healthier exchequer means we’re in a better position to provide safety nets in terms of wage supports.

The second reason for the stronger-than-expected out-turn is multinationals. Big firms in the pharma and IT sectors here have traded strongly through the crisis. We can see this via the lens of corporation tax. Business tax receipts hit a record €11.8 billion last year and now account for more than €1 in every €5 collected in taxes by the Government.

Stronger-than-expected income tax and corporation tax receipts have softened the hit to the public purse.

Combined with the fact that a no-deal Brexit has been averted, the public finances start the year in relatively good shape, albeit under threat from the latest lockdown and uncertain outlook generally.

The National Treasury Management Agency’s ability to borrow at ridiculously low rates, even in the context of low rates generally – it sold €5.5 billion of 10-year bonds at a yield of -0.27 per cent on Tuesday – underscores this.