Tax returns: proceeding with caution

Another sluggish month will be causing some concern in Government

 

We have got used to tax returns coming in ahead of schedule in recent years, underpinned by economic growth that was higher than anticipated as we emerged from the great economic crash. So the exchequer returns in the early months of this year have been something of a surprise. Despite signs that growth remains strong, tax revenues are a bit below expectations, coming in 2.4 per cent lower than forecast for the first four months of the year.

This may be a temporary blip. Irish tax returns are volatile at the best of times and can be heavily influenced by timing factors. One of main areas of weakness has been income tax which appears to run counter to all the other data from the jobs market. And there is plenty of time yet – including the key Autumn period – for returns to get back on trend.

Still, . If this continues, the forecasts for Budget day would have to be adjusted leaving less room for new spending programmes or tax reductions. It is too early to conclude that this is probable but if the tax take does not show some signs of recovery in the next couple of months, it will become a real possibility.

Given the delicate balance in the Dáil, and the likelihood of a new Taoiseach being appointed, weakness in tax revenue would add another layer of uncertainty to an already-fraught political outlook. After all, the existing and emerging demands on the State’s cash are well ahead of what is likely to be available.

Only time will tell whether tax revenues will bounce back, as economic data suggest that they should. But it would be unwise to take this for granted. The amount of spare cash on Budget day, even on existing tax estimates, will be limited enough.

As the Government finalises its ‘Summer Economic Statement’, which will set its expectations for the Budget, it would be wise to err on the side of caution. Above all, with the uncertainties of Brexit approaching, now is not the time to let budget deficit targets slip. On the contrary, it would be wise to have some leeway heading into 2018.

The reliance of the exchequer figures on growth in corporation tax in recent years provides another reason not to take risks.We now depend on 10 firms to pay around 40 per cent of our corporation tax. A shift in the fortunes of a couple of these companies, or even a decision to change accounting practices, could reverse the strong trend of recent years.

There is no need to panic just yet. Underlying economic statistics remain firm. But the tax figures do show the need for caution. Tax revenues, like investments, can fall as well as rise – a reality that should be etched indelibly in our collective memory.

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