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Buoyant VAT receipts not necessarily a sign of economic health

Latest exchequer returns show State finances boosted by receipts from sales tax, but what is driving that?

VAT receipts can provide an insight into the relative buoyancy or otherwise of consumer spending (in this case at the busiest time of the year).

Eoin Burke-Kennedy's face
Eoin Burke-Kennedy
Wed Feb 7 2024 - 06:00

January’s exchequer returns don’t provide much to go on in terms of trends. Income tax receipts tend to be a continuation of what we’ve had in recent months, while January is a non-month for corporation tax.

The latest data, published by the Department of Finance on Tuesday, shows just €57 million in business tax receipts – of the €24 billion the department is expecting for the year as a whole – flowed in last month, a veritable trickle.

VAT receipts, which are typically impacted by Christmas trading, are perhaps the exception.

[ Economy to grow 1.5% this year with boost to consumer spending, says Bank of Ireland ]

They can provide an insight into the relative buoyancy or not of consumer spending (in this case at the busiest time of the year), the most important metric in any economy. Private consumption expenditure accounts for about two-thirds of national income. Put less technically, when consumers stop spending, the economy stops turning.

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Extrapolating what’s going on under the bonnet of Irish households from the current suite of VAT numbers has, however, become problematic. That’s because of inflation. During periods of high inflation, consumers have to spend more to buy the same amount of goods, which inadvertently boosts government VAT receipts.

You would be wrong, in these circumstances, to interpret bigger receipts from the sales tax as a sign of economic health.

[ State collected €7.8bn in tax in January amid strong VAT receipts ]

The inflation-forced spend on the part of consumers may be at the expense of running down savings or running up bills in other areas. Such a trend could in theory run alongside rising mortgage arrears and/or loan defaults.

The latest exchequer returns show VAT generated €3.8 billion in January, up 4 per cent or €148 million on the same month last year. But the year-on-year comparison was skewed because of a technical factor linked to the withholding of VAT in December 2022 and December 2023. On an adjusted basis, the year-on-year increase was 7 per cent.

While we can’t separate the boost stemming from additional retail volumes from the boost linked to inflation, we can infer, from the strength of the numbers, that consumer spending, despite the squeeze from inflation and higher interest rates, remains relatively strong. This may change in the coming months. The main economic projection is for slowing growth in 2024 but for now the Irish economy and the public finances remain in a relatively good space.

“With interest rates likely to have peaked, there will be optimism that this level of spending and resultant VAT receipts can be maintained throughout the year,” Peter Vale, a tax partner at Grant Thornton Ireland, said. “While inflation is a factor, the strong VAT figures point to more than inflation underpinning the growth.”

[ Revenue launches public consultation to modernise VAT reporting ]

Overall the Government collected €7.8 billion in tax in January, which was 5 per cent ahead of the same period last year. The strong numbers were also aided by income tax, which generated €2.9 billion, nearly 3 per cent ahead of the same month last year, reflecting the ongoing strength of the Irish labour market.

Despite the international turbulence, the number of people at work in the Irish economy hit a record high of 2.6 million last year.

“This is a solid start to the year, and is a clear and welcome demonstration of the continuing resilience of our economy, notwithstanding the undoubted headwinds in the global economy,” Minister for Finance Michael McGrath said, while noting inflation was continuing to moderate and unemployment remained near an historic low of 4.5 per cent.

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