The Covid-19 pandemic unemployment payment will likely be extended through to the end of the year adding to the costs of the exchequer but the budget deficit may not necessarily balloon more than already feared if early positive signs for tax revenues are realised, a leading economist has said.
Kieran McQuinn, research professor at the Economic and Social Research Institute, said there has been positive developments in recent days for the prospects for the recovery, including the easing of the lockdown restrictions, a tentative hopes that corporation and income tax revenues will hold up better than once feared, as well as the determination of EU leaders to underpin a Europe-wide recovery.
“There are three positive things: The easing of the economic restrictions which boosts economic recovery; the fact that the tax receipts are holding up in some areas; and the developments at the EU level which will help Europe and ourselves to come out of this,” Prof McQuinn told the Irish Examiner.
Last week, Finance Minister Paschal Donohoe and Government officials hailed better-than-expected corporation tax receipts in May as potential evidence that pharmaceutical and tech giants based here and whose global revenues haven’t been hit by the pandemic fallout, will also exceed expectations through the rest of the year.
That in turn could ease some concerns that the budget deficit will inevitably rise above the worst-case outcome of €30bn this year, when the additional costs of supporting the economy by way of the €350-a-week pandemic unemployment and the wage subsidy schemes are taken into account.
Including the regular live register unemployment count, a combined 1.28 million people are in need of some sort of Government payment during the crisis, according to the most recent figures.
May's income tax receipts also held up surprisingly well, probably reflecting the number of jobs that are being supported by the pandemic and wage-subsidy schemes, Prof McQuinn said.
“It is still June and November which are the big months for collecting corporation tax receipts and that will ultimately tell how strong the receipts are for the year, but that they are strong so far is encouraging,” he said.
He said the ESRI had noted in its recent quarterly report that corporation tax receipts had risen strongly at the start of the year but with the caveat that it was still far too early to predict because the Covid-19 economic fallout is such an unprecedented event.
“If the corporation tax receipts do hold up, it will help Government revenues to hold up because the big unknown is corporation tax receipts,” he said.
“Separately, the income tax revenues have been shored up with the Government [pandemic] payments, which is keeping up some of the tax sources, but obviously other activity sources such as the Vat and excise are already posting significant declines,” he said.
“On the exchequer side, we don’t know how much the costs of the pandemic will add up. Our quarterly was based on the assumption that the pandemic payments would come to an end at the end of June and that obviously is not the case and the pandemic payments will continue in one shape or form to the end of the year. That means the cost side is going to be higher,” Prof McQuinn said.
On Government unemployment supports, he predicted the pandemic payments and wage-subsidy schemes would likely be extended to the end of the year to support the economy. “As time moves on it may be necessary to integrate the two payments to encourage people to get back into the labour force,” he said.
“But in the short to medium term the payment is necessary to stabilise the economy and some sign of that may be in the income tax receipts which have not fallen as you would expect them to fall given the complete shut down of economic activity," Prof McQuinn said.
The Government should be credited with the speed by which it introduced the pandemic and wage-subsidy schemes, he said.
Meanwhile, business group SME Alliance, which is led by John Moran, the former secretary-general at the Department of Finance, said the Government needs to target aid to small firms with grants and "less costly" liquidity "so that "the right medicine can be delivered to the ailing sector".