The Irish Times view on the public finances: caution needed

The latest tax figures are encouraging, but the uncertain economic outlook suggests that continued buoyancy cannot be taken for granted

Record exchequer figures for July show that the State collected €43.5 billion in tax in the first seven months of the year, €8.3 billion more than in the same period in 2021. As inflation surges and with yet more energy price hikes still to come, this extraordinary return has set off a clamour within the Government and the Opposition for more to be done in the September budget in response to the cost-of-living crisis. That is inevitable, but caution is warranted and measures should be carefully calibrated to help the most vulnerable households.

The July figures result from big increases in corporation tax payments as well as buoyant income tax and VAT. The €5 billion exchequer surplus was in contrast to €5.7 billion deficit one year previously. The €10.7 billion turnaround was attributable both to tax revenue growth and reduced spending thanks to the unwinding of Covid-19 supports which added €33 billion to the national debt in two years.

But just as the health emergency recedes, these figures come amid acute geopolitical and economic turmoil resulting from Vladimir Putin’s war on Ukraine. The threat of Russian gas supplies to the EU being cut off raises the prospect of a winter crunch that would set fuel prices even higher. This would raise the prospect of recession in Germany if its heavy industry was starved of energy, a prospect that would bode ill for the wider European economy and for Ireland. Forecasts of a UK recession also threaten the outlook here.

Although the July returns suggest the public finances are in a strong position for the moment, it would be wrong to take too much comfort from them. These are exceptionally uncertain times, with multiple risks weighing on the outlook and little sign of anything on the horizon to ease the tension.

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Still, record returns invite comparisons. The public finances hit bottom in 2010 ,when the last financial emergency was at its worst. That year, the State collected €31.75 billion in tax. That sum had dropped precipitously from €47.25 billion in 2007, the highest return in a single year pre-crash.

There is no need here to revisit the grave political and economic crisis set off by that fiscal collapse. But it is noteworthy that seven months of tax collection this year brought receipts to a level not far off that collected in an entire year just before the financial crash hit.

The dynamics this time are different, but we have seen before how quickly trouble can build. Just as the value of shares can rise or fall, the same is true of tax collection and public spending.

Some scope has opened to go a little further than the promised €6.7 billion cost-of-living package in the budget, notably via additional once-off measures. But the July returns are but a snapshot at a time of extreme volatility.