Consumer spending holds up as VAT receipts help limit Q1 State deficit to €4.1bn

The Government has highlighted the “resilience” of consumers and the labour market, as a rise in income tax and VAT receipts helped to limit the huge expansion of Ireland’s fiscal deficit.

Exchequer returns for tax and spending in the first three months of the year showed a deficit of €4.172 billion, with tax receipts up 1 per cent on the same period last year despite the lockdown, and spending up 14 per cent to €19.5 billion. The exchequer deficit for the corresponding period in 2020 was €2.5 billion.

VAT receipts rose by 8.4 per cent, or €350 million, over the three months while income tax receipts were up 4 per cent.

Paschal Donohoe, the Minister for Finance, said part of the VAT rise was a "base effect" caused by deferment of VAT payments last March as the economy entered crisis mode, which flatters the comparison.

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However, he also said there was a real resilience in VAT receipts that showed consumers and businesses had “adapted and innovated” to trade online during the ongoing lockdown, which has shut all non-essential retailing in the State for the entire quarter.

The Government says the figures also underline how severe the first lockdown was last spring, compared with the current shutdown, which is far more prolonged but somewhat less restrictive.

Mr Donohoe suggested that the current lockdown is having only half the detrimental impact on consumer spending that the first lockdown of March 2020 had.

Analysts and the Government have predicted a further boost to VAT receipts and public spending in the second half of the year, as vaccines kick in and allow reopening.

Savings rates

"Unquestionably ongoing Government supports continue to prop up VAT receipts. Savings rates remain high, with the possibility of a large uplift in spending once restrictions ease. If this materialises, VAT returns will increase significantly," said Peter Vale, a tax partner ar Grant Thornton Ireland.

Michael McGrath, the Minister for Public Expenditure, said spending in the first quarter rose 14 per cent, or by €2.5 billion, as the State pays out income supports to hundreds of thousands of workers affected by the pandemic.

He said the impact of the pandemic on the State’s finances was “most stark on the spending side”. On a rolling 12-month basis, public expenditure is up 26 per cent, or by €18 billion. On the same rolling 12-month basis, the State has spent almost €14 billion more than it has collected in taxation.

The Minister said the State has spent about €12 billion in the pandemic so far on income supports for workers affected by restrictions. He suggested that two Covid back-up funds set up by the Government last year in October’s budget would be “largely accounted for if not fully spent” by the end of June.

Corporate tax

Meanwhile, Mr Donohoe reiterated that "change is coming" for the global corporate corporate tax system and the changes would be accelerated by the pandemic. He was responding to a call on Monday from Janet Yellen, the US treasury secretary, for a global minimum corporate tax rate, which could threaten Ireland's ability to compete on tax.

The Minister for Finance remained sanguine, however, on the long-term prospects for the Irish economy after the pandemic passes. “The foundations are there to rebuild,” said Mr Donohoe.