Economy

Lower tax take than expected will not alter budget arithmetic much

Cantillon: struggle to explain sluggish wage growth as employment rises

A lower-than-expected tax take for the first eight months of this year means Minister for Finance Paschal Donohoe has even less room for manoeuvre when it comes to framing Budget 2018. Photograph: Getty Images

Tue Sep 5 2017 - 06:38

The latest exchequer numbers don’t really change the dynamic as we head towards October’s budget.

For some time now we’ve known that the carry-over effects of the previous budget combined with the new pay deal would severely limit the scope for tax cuts or spending hikes.

The fact that the Government’s own projection for tax has failed to materialise, albeit by €209 million, isn’t helpful but nor is it the end of the world.

The Department of Finance has blamed the weaker-than-expected trend in tax on its own forecasting model for the universal social charge (USC), which apparently overestimated the impact of wage growth on the tax.

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While there’s no reason to doubt this explanation, it feeds into a wider phenomenon which is evident elsewhere, namely that higher rates of employment are not translating into bumper income tax revenues for governments. This has been the case also in the US and in the UK.

Rapid accelerations in employment, as we’ve had here, are typically accompanied by a pick-up in wage growth as employers chase a shrinking pool of labour.

However, to date wage inflation here and abroad has been moderate. According to the Central Statistics Office (CSO), average hourly earnings rose by a meagre 1.1 per cent last year from €21.92 to €22.16.

This year has been a bumper year for job growth, exceeding even the Government’s optimistic expectations. Yet nobody seems to have a good explanation for the sluggish rates of wage growth here.

Could it be that a greater number of young people are getting the new jobs and commanding less income?

Or is that the financial crisis still casts a shadow over the landscape, making firms nervous about rising wages too rapidly?

Or perhaps employees are nervy about demanding higher wages given what they’ve been through?

It might also be that the jobs being created are badly paid, limiting the pressure on wage inflation and the accruing tax dividend for governments.

Either way, the Government’s revenue from income tax is one to watch as we head towards full employment.

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