Consumer spending vital to balancing budget

Consumer spending vital to balancing budget

By Brian Keegan

Ever since the crash in 2008, income tax has been the dominant contributor to the country’s tax take, followed at some distance by Vat.

Tax from capital gains and stamp duties became virtually non-existent because of tumbling asset values. Our falling consumption of everything from cars to clothes resulted in reduced yields in Vat and excise.

Most taxes, except capital gains tax and stamp duties, have by now recovered to pre-crash levels and the overall figure for tax receipts in 2017 was higher than the amount collected a decade earlier.

The nation isn’t as wealthy as it was because we’re paying €6bn or so a year in interest on the national debt, which was a bill we didn’t have before the recession. But during the first quarter of 2018, Vat receipts outstripped income tax receipts.

From the Government’s point of view, Vat is a tax that comes in lumps. Even though we as consumers pay Vat on a continuing basis, most businesses tend to account for Vat every two months.

The Vat paid by consumers during January and February goes to the exchequer in March. More particularly, the Vat collected in November and December is accounted for in January of the following year, so the exchequer returns for the first quarter of 2018 show the buoyancy in consumer spending around last Christmas.

Vat is predominantly paid by individual consumers, as most businesses can claim credit for the Vat they pay on purchases against the Vat they recover on their sales.

In contrast, most income tax is paid over to Revenue through the PAYE system on a monthly basis. Over the course of the year, the cumulative income tax receipts will outstrip Vat receipts.

It’s projected that in 2018, there will be €3 in income tax for every €2 in Vat. Nevertheless, the parity between income tax and Vat in the first quarter of this year suggests an underlying position of strong consumer demand.

Consumer sentiment surveys have their value, but nothing quite trumps the truth serum of actual cash flowing into the Collector General’s office.

The question now is whether this buoyancy in consumer spending, and hence a buoyancy in Vat receipts, is sustainable. Last week’s Quarterly Bulletin from the Central Bank of Ireland suggests that it is.

The bulletin notes that the pattern of consumer spending of late has been on goods rather than on services. However, they are saying that continued strength in income and employment should support a pick-up in consumer spending but also on consumer behaviour, not just in 2018 but also during 2019.

That’s just as well, because not all the exchequer returns are as positive as Vat.

The single biggest tax change in last year’s budget was the hike in the rate of stamp duty on commercial properties from 2% to 6%.

Stamp duty is charged as a percentage of the purchase price of a property. This was the measure being depended upon to balance the budgetary arithmetic, and projected to bring in a further €376m in the course of the year.

There was some scepticism that commercial real estate transactions during 2018 would be sufficient to generate this amount — sales of commercial property during 2018 would need to total €10bn in value. So far this year, the stamp duty receipts are not on track.

A balanced budget has always depended on what individuals earn and the income tax that flows from those earnings. In future years it will depend equally on the Vat on the spending power of individuals.

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