The official forecast for tax revenue this year has been trimmed by about €500 million, as the Government responds to recent signs of weakness in corporation tax returns.
This follows years of overperformance when successive surges in corporation tax meant revenues continually outperformed. However, the exchequer is still expected to be strongly in surplus this year and Minister for Finance Michael McGrath says the planned budget package for 2024 will not be affected. Mr McGrath is due to deliver next year’s budget on Tuesday.
The forecast, contained in the pre-budget White Paper published on Saturday, shows corporation tax coming in about €750 million below expectations this year at €23.5 billion, with the 2024 forecast cut by a similar amount to €24.5 billion. An overperformance by income tax and PRSI helps to make up some of the difference. The figure for net Government spending has been increased by €200 million, though gross spending figures by department will only be published on budget day.
Below target
While the reduction in the tax forecast is relatively small, it follows years during which taxes inevitably came in well above forecast, driven by sustained strength in corporation tax. Mr McGrath, commenting on the figures, said that this was a reminder of the external risks facing the Irish economy and the reliance on corporation tax via a small number of companies.
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Because corporation tax is below target, the estimate for the general Government balance, the key figure for the public finances, is for a surplus of €9.6 billion this year, compared to the previous estimate of more than €10 billion. The surplus for next year is now expected to be €12.5 billion. While this 2024 figure is down from an estimate of over €16 billion earlier in the year, this is mainly due to a technical change, with the €4 billion cost of housing Ukrainian refugees now being counted in. Had this not been recognised in the White Paper it would have been deducted on budget day.
The surplus figures for this year and next will be reduced by budget-day measures. The Government has promised a series of once-off payments to households, many of which will be paid this year and will thus reduce the 2023 surplus. Permanent changes to spending of more than €2 billion and €1.1 billion in tax cuts — not yet counted in the figures — will come into force next year and will thus be deducted from the 2024 surplus, which will as a consequence fall below €10 billion.
With significant surpluses still anticipated, the Minister for Finance said in his statement that the budget will outline plans to put some of the excess cash into special funds to help support future investment in the economy and also to generate an interest return to support general spending. A central aim is to ensure that there will be funds available to support investment if economic growth slows sharply and tax revenues are hit.
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Looking forward to next Tuesday, he said that the key budgetary parameters would be maintained, adding that the key challenge was to support households and businesses without adding to inflation.
VAT receipts
The White Paper shows that before any budget measures, the Department of Finance estimates that total tax revenue will rise from €88.35 billion this year to €93.3 billion next year. Indicating that the department expects the jobs market to remain strong and wages to continue to rise, income tax is expected to increase from just under €33 billion this year to €35.2 billion next year. VAT receipts are forecast to rise to €21.8 billion from €20.435 billion this year, suggesting a modest rise in consumer spending.
The figures are based on revised economic forecasts from the department which will be published alongside the budget. The boost to the State from surplus income at the Central Bank is expected to run out, falling from €500 million this year to zero in 2024. The cost of servicing the national debt is expected to rise modestly from €3.4 billion this year to €3.85 billion next year. while the State’s contribution to the EU budget will hold steady at just under €4 billion,
