Inflation bogeymen proves boon for exchequer

The Department of Finance was loath to mention it but it was plain to see in the numbers . One of the key drivers of the Government's buoyant tax numbers, outlined in the latest set of exchequer returns for March, is inflation, the same force that has left households scrambling to pay energy bills and the wider economy in the biggest cost-of-living squeeze in decades.

A sudden upsurge in prices means consumers are paying more for everything and paying more VAT as a result. The big winner – in the short term at least – is the Government coffers. According to the exchequer numbers, the sales tax generated €5.85 billion in the first three months of the year, 30 per cent more than in the same period of 2021. Inflationary pressure in the Irish economy also extends to wages and upward pressure on incomes means more income tax receipts for the exchequer. Income tax generated €6.8 billion, up 16 per cent on the same period last year, according to the data. Overall the Government generated a surprise budget surplus of €200 million in March, compared to a deficit of €4.2 billion recorded at the end of March 2021, an improvement of over €4.3 billion. With inflation ticking up all the time and the Government under pressure to provide more supports, the notion that inflation may be improving the public finances is probably not something the department wants to broadcast.

That said, the boost could be short-lived especially if the cost-of-living squeeze and the pressure on real wages morphs into a contraction in consumption, and a reduced outlook for growth. "Higher prices for energy and other goods will weigh on economic growth in the months ahead, and this will affect tax revenue," Minister for Finance Paschal Donohoe said, while noting that the costs associated with housing refugees fleeing the fighting in Ukraine would be "substantial". The Government's Stability Programme Update, due out next week, will provide a clearer picture of where he thinks the public finances are headed.