Downbeat consumers may spark Vat shortfall

The Government may be hard-pressed to meet its Vat revenue target this year because few consumers are sharing the robust feel-good factor that the huge GDP growth numbers might suggest, an author of the latest snapshot of spending sentiment has said.

Consumers were still missing the feelgood feeling from the recovery which means politicians should be wary over the timing and the campaign messages if an election is called this year, the survey by KBC Bank and the Economic and Social Research Institute showed.

The December survey found that many consumers — although increasingly confident about the economy from a year earlier — are unenthused about their own finances, and are unlikely to spend big this year.

The Government in its October budget forecast that “relatively robust consumer spending” will drive a 5% increase in Vat receipts this year.

The 2017 exchequer returns published last week showed that Vat receipts rose by just over 7% in the year to €13.3bn but fell slightly short of budget expectations.

After income tax, Vat is the second largest of tax revenues for the Government.

However, KBC Bank chief economist Austin Hughes said lacklustre growth in consumer sentiment will likely influence everything from the Vat revenues the Government will collect this year to the timing of the election.

He projected Vat revenues will probably increase in line with a consumer spending pickup of over 3% but not by the stellar amount as suggested by GDP growth numbers.

“Politicians need to be careful not to assume that the rebound of GDP will translate into very positive consumers. The feelgood is still lacking, which will influence the timing of the election and election campaign messages,” he told the Irish Examiner.

“With consumers likely to see relatively modest income gains and disinflationary pressures likely to continue in many retail areas, the 2018 out-turn is likely to be solid rather than spectacular” said Mr Hughes.

“I think the envisaged increase of just under 6% is feasible but with the department expecting consumer spending to rise around 4% in cash terms and a risk of ongoing leakage through online sales and spending abroad, it may not be easy to meet the Vat target,” he said.

The huge recovery in the value of GDP beyond its level of before the crash of 10 years ago has not boosted consumer spending by anywhere near the same amount, according to the survey.

Cumulative spending is only 3.8% above its pre-crash 2008 peak and probably has grown by less because the State’s population has grown strongly, Mr Hughes said.

“The absence of a broadly based feelgood factor in these consumer confidence data reflects both the limited nature of the gains for most households and, for many, the lasting nature of problems encountered since the downturn,” the survey says.

Across the eurozone, investors felt upbeat in January, a survey by Sentix found.

“The economy in all regions of the world is looking stable and positive and is showing moderate improvements,” the Frankfurt-based research firm said.