Shortfall in tax returns points to tight Budget 2018

Income and corporation taxes need to come right if overall numbers are to stay on track

Minister for Finance Michael Noonan. Income tax is running just 0.5 per cent ahead of last year’s levels and is below target growth levels. Photograph: Niall Carson/PA Wire

Minister for Finance Michael Noonan. Income tax is running just 0.5 per cent ahead of last year’s levels and is below target growth levels. Photograph: Niall Carson/PA Wire

 

What are we to make of the latest tax returns? All the economic indicators are positive, yet tax continues to come in below the budget expectations. The shortfall in the first four months was 2.4 per cent, with income tax and corporation tax being the main culprits and excise duties also below target.

Income tax trends are quite a puzzle. All the indicators from the jobs markets are positive, with a strong pace of new job creation and a falling unemployment rate. Yet income tax is running just 0.5 per cent ahead of last year’s levels – and is below target growth levels. The Department of Finance says overall PAYE receipts are broadly on target and the shortfall is in USC and Dirt tax, though this doesn’t really help to answer the conundrum.

Are a significant number of the new jobs being created at lower wage levels than the department and the Revenue Commissioners anticipated? This seems unlikely given the strength of the jobs market and skill shortages in some areas, but it is a possibility. Whatever the reasons, the Government needs income tax to come right if its overall numbers are to stay on track.

Corporation tax

The same applies to corporation tax, also below expectations. This tax is traditionally lumpy – and can depend on the timing of big receipts – and May is a big payment month. Ireland has got a boost from multinational restructuring in the last couple of years, leading to more profits being declared here. In tandem with the general trend to higher profitability, this has driven corporation tax receipts higher.

The Revenue has judged that this is sustainable, but with 40 per cent of corporation tax revenues coming from just 10 big players, there is some vulnerability here. Again, the May figures will be awaited with keen interest as they will be the first really big indicator of trends in this area in 2017.

The department’s summer economic statement, giving an official updated estimate of the room for manoeuvre in the budget, will probably be due some time in June.Tweaking the tax forecasts could be tricky. And for the first time in a few years taxes may not come in way ahead of target, providing some extra leeway. The indications remains that there will not be a lot of scope in Budget 2018, despite a huge pile-up of demands.

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