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Why is the Government so flush with tax when households are struggling?

Government tax receipts came in at €12 billion at the end of February, up 5.5 per cent on the same period last year

The Government may set up a National Reserve Fund to invest corporation tax windfall gains. Illustration: Dean Ruxton

The strength of post-Covid labour markets has been one of the most eye-catching features of the global economy. Illustration: Dean Ruxton

Eoin Burke-Kennedy's face
Eoin Burke-Kennedy
Tue Mar 5 2024 - 19:36

One of the main reasons why it’s so difficult to tell what’s going on economically at a household level in Ireland is the use of cumulative metrics.

The economy – as measured by modified domestic demand (MDD) – narrowly avoided recession last year, growing by 0.5 per cent, according to recent figures from the Central Statistics Office (CSO). This was primarily down to a 3.1 per cent rise in consumer spending even when adjusted for inflation.

You might reasonably ask yourself, how the heck are households increasing their spending when they are under the cosh from higher energy bills, increased food prices and bigger monthly mortgage repayments?

The answer is, they’re not.

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The increase reflects a bigger population with more people at work than ever before – 2.71 million to be exact – which means more people earning and more money being spent in the process, leading to a “cumulative” increase in consumer spending.

This doesn’t discount the fact that many individual households remain mired in a cost-of-living squeeze, with some having to cut back on non-essentials or run down savings to pay for basic stuff. Short-term mortgage arrears are also on the up.

This is perhaps a long-winded way of saying that the positive macroeconomic variables that seem to go hand-in-hand with the Irish economy hide a more nuanced picture at ground level.

[ Strong income tax receipts keep public finances on right track ]

All of which brings us to the latest exchequer numbers, which show Government tax receipts at €12 billion at the end of February, up 5.5 per cent on the same period last year.

The figures were driven in the main by strong income tax receipts (which were up nearly 6 per cent at €5.3 billion), again a reflection of the record 2.71 million people at work in the economy.

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The strength of post-Covid labour markets has been one of the most eye-catching features of the global economy. Although inflation has come down significantly, European Central Bank policymakers remain worried that wage growth in the services sector, in part a reflection of strong labour markets, may keep inflation higher for longer and interest rates higher for longer as a result.

February is generally the quietest month of the year for exchequer returns. It’s a non-month for VAT and corporate tax. So the focus is typically on whether we’re seeing any shift in the momentum or otherwise behind income tax. Judging from the latest set of figures, the answer is, no.

“Overall, despite evidence of a slowdown in wage inflation, income tax receipts remain strong, likely fuelled by greater numbers in employment,” Peter Vale, tax partner at Grant Thornton Ireland, said.

Central Statistics Office