Paschal Donohoe warns of uncertainty as deficit rises

Finance Minister Paschal Donohoe sees "considerable and unprecedented" uncertainty ahead, despite less severe tax revenue declines than anticipated

Finance Minister Paschal Donohoe has said a “considerable and unprecedented” amount of economic uncertainty remains despite the latest fall in tax revenues being less severe than anticipated.

The State’s budget deficit – which the Government is hopeful of keeping below €30bn for the full year – increased to almost €9.5bn by the end of August. That figure was €7.4bn at the end of July. The deficit for 2019, as a whole, was just €625m in comparison.

The huge increase in the deficit is due to the Government’s increased spending across health, employment and social protection in reaction to the Covid-19 pandemic crisis.

“A deficit of this magnitude underlines the extent of the challenge we face – once the economy recovers – in placing the public finances on a sustainable trajectory,” Mr Donohoe said.

The Government took in just under €3.1bn in tax revenues in August – down €11m, or 0.4% on the same month last year. However, August is one of the quieter tax months of the year.

For the first eight months of the year, the Government has taken in just over €34.2bn in tax revenue. This is down by just 2.3% - or €802m – year-on-year, largely thanks to a strong overall performance at the start of the year, particularly from corporation tax, which compensated for declines in other areas, notably Vat and excise receipts.

Income tax receipts amounted to €1.75bn for the month – down nearly 6% year-on-year. However, for the first eight months, income tax revenue is down just 1.4% at €13.9bn. Corporation tax continues to help hugely, currently being 31.4%, or €1.55bn, ahead of last year’s take. Even in a quiet August, corporation tax receipts grew by €100m year-on-year to €418m.

Despite an over-performance in August, due to late payments from July, Vat receipts remain down by over 21%, or €2bn, on the first eight months of last year. This reflects the significant recent decline in personal spending.

Mr Donohoe said the August figures “confirm the scale of the cost of fighting this pandemic”.

“Although there are some positive developments – most notably in income tax receipts – a considerable and unprecedented amount of uncertainty remains,” he said.

Peter Vale, tax partner at Grant Thornton, said the low level of tax receipt decline is “a remarkable outturn” given the Covid backdrop.

He said the income tax figures – combined with government supports such as wage subsidies – suggest that disposable income levels have not changed significantly, while there is also evidence that consumer spending is starting to return to some level of normality.

"Clearly however, any reduction in government supports over the coming months will impact on disposable incomes and have a resultant negative impact on spending and Vat receipts, unless there is a quicker than expected return to pre-Covid employment levels," he said.

"Overall, the combined figure for income tax and Vat for the full year is expected to be well behind 2019 but ahead of the Department’s revised Covid forecasts."