Jim Power: Getting the public sector fit for purpose

In 2021, the exchequer deficit came in at €7.3bn, which is €5bn lower than the previous year, despite the significant levels of Covid restrictions

It would be impossible to have a functioning society without a functioning economy, although the latter does not automatically lead to the former, but it is a good starting point. 

One of the more interesting features of the Irish economic performance over the past two years has been the remarkable buoyancy of tax revenues. 

The data for 2021 released by the Department of Finance last week make for positive reading. 

The exchequer deficit came in at €7.3bn, which is €5bn lower than the previous year, despite the significant levels of Covid restrictions.

Total tax revenues were €11.2bn ahead of 2020 and a new record level of €68.4bn  was collected in total. 

The three main categories of taxation — income tax, Vat, and corporation tax — which account for 84% of all tax revenues performed very strongly.

The income tax take accounted for 39% of total revenues and came in almost €4bn higher than 2020. 

This buoyancy occurred despite the fact that hundreds of thousands of workers were in receipt of the pandemic unemployment payment for much of the year. 

This goes to show that those workers least affected by Covid restrictions tend to be in relatively highly paid sectors and given the extremely progressive nature of the Irish income tax system, they continued to pay the bulk of income tax. 

Vat accounted for over 22.5% of total tax revenues and was €3bn higher than 2020, reflecting stronger consumer spending, while the increase in new car registrations made a significant contribution to the Vat performance. 

New car registrations deliver a lot of money to the exchequer.

Corporation tax receipts hit a record high of €15.3bn and accounted for almost 22.5% of total tax collected. 

This reflects the ongoing very strong performance of a small number of multinationals, as well as corporation tax changes in recent years.

All in all, the tax collection story sends out a strong message about the resilience and strength of the Irish economy. 

Given that certain segments of the economy are still being subjected to significant levels of restrictions that will necessitate ongoing justifiable financial support from the exchequer, it is just as well that extreme buoyancy is a feature of the economy as we settle in to 2022. 

If tax revenues had not held up, we really would be in a very difficult fiscal situation. 

The experience of the past couple of years demonstrates in vivid fashion the importance of maintaining a functioning economy, which in turn generates the tax revenues necessary to fund public expenditure. 

It would be impossible to have a functioning society without a functioning economy, although the latter does not automatically lead to the former, but it is a good starting point. 

As we move inexorably towards the next general election, which could see a dramatic shift in the Irish political landscape, it is important for all parties aspiring to form the next administration to recognise the vital importance of maintaining a functioning business economy. 

Introducing policies that would damage entrepreneurship, risk taking, and business activity would risk killing off the goose that lays the golden egg.

While the recent tax revenue buoyancy is really positive and important, it would be dangerous to get carried away by committing to public expenditure on the back of what could turn out to be a transitory tax base. 

We did this to devastating effect in the run up to 2007, when the State spent money aggressively on the back of a construction and property-related tax base that disappeared almost overnight. It is important not to repeat that mistake.

Specifically, the main area of vulnerability concerns the outlook for corporation tax and the sustainability of recent record levels of revenue. 

Nobody really understands or can forecast accurately what will happen to this component of taxation over the next few years, but the prudent approach would be to control expenditure. 

The leader of Sinn Féin criticised elements of the public sector recently, and while this elicited a very negative reaction in some quarters, she was making a sensible point. 

As a country we spend a lot of money on public services, and so we need to be as certain as possible that the public sector is fit for purpose and that the best possible value is delivered with scarce resources.