Surging VAT receipts linked to higher inflation have boosted the Government’s finances for the start of the year.
The latest exchequer returns show the sales tax generated just over €4 billion in the first two months of 2023, almost €700 million or 21 per cent up on last year’s total at this stage.
Inflation is the main driver of this increase in VAT receipts, with consumers spending more to buy the same amount of goods as this time last year.
[ Irish inflation unexpectedly rises to 8% in FebruaryOpens in new window ]
[ ECB confronts a cold reality: companies are cashing in on inflationOpens in new window ]
Department of Finance officials have warned that while a temporary spike in inflation can boost VAT receipts, persistently high inflation has historically led to a decline in consumer and business spending, resulting in weaker tax revenues.
The department noted on Thursday that VAT receipts had also been boosted by a technical factor, with €200 million of receipts withheld from December’s figures to fund potential repayments in January being returned to the exchequer.
Even after adjusting for this, growth in VAT receipts was still a robust 15 per cent.
Overall, the Government collected €11.4 billion in taxes in January and February, which was almost €1.3 billion or 12.6 per cent ahead of the same period last year, putting the public finances on a sound financial footing at the start of the year.
Apart from VAT, the increase was also driven by strong income tax receipts, which totalled €5.1 billion for the two-month period, up €348 million or 7.4 per cent year on year. The positive trend in income tax receipts reflects the strength of the labour market.
While February is not generally a major month for corporation tax, the business tax has generated €646 million so far this year, up €345 million or 115 per cent on the same period last year.
“Today’s figures show that tax receipts continued to record robust growth in the opening months of this year,” Minister for Finance Michael McGrath said. “In particular, the solid growth in income tax and VAT receipts are a positive signal of the resilience of the domestic economy, and underline the strong employment performance with almost 2.6 million now at work,” he said.
Overall, the exchequer recorded a deficit of €2.5 billion at the end of February. This compared to a surplus of €900 million in the same period last year.
[ Corporation tax booms again, but can the trick be repeated?Opens in new window ]
The €3.5 billion negative swing was due to the transfer of €4 billion to the National Reserve Fund. Mr McGrath transferred €4 billion worth of exchequer funds to the fund at the start of February. The transfer brings to €6 billion the total that has been placed in the fund since last year.
The funds were generated from bumper corporation tax receipts, which amounted to a record €22.6 billion in 2022, ahead of the previous year by €7.3 billion (48 per cent).
At budget time last September, the Government signalled it would set aside €2 billion in 2022 and €4 billion this year, placing them in the fund as a buffer against future shocks.
“This will help rebuild our fiscal buffers and ensure that we are in a position of strength to meet the challenges, and seize the opportunities, of the future,” Mr McGrath said.
Total expenditure for the two months to the end of February was €17.3 billion. Non-voted expenditure accounted for €5 billion, €2.7 billion ahead of the same period in 2022, driven by the €4 billion transfer to the National Reserve Fund, the department said.
“I am acutely aware that for so many, the high cost of living and in particular high energy bills are a real challenge. This Government has acted repeatedly to provide direct relief to people and firms struggling with the rising cost of living,” Mr McGrath said.
