The impressive strength of the exchequer returns in the first quarter of the year appears to stand in contrast to the problems now facing the economy due to the war in Ukraine. To an extent, the strength in taxes and the favourable exchequer position provides the State with some leeway to meet the challenges it now faces. But there is also the obvious point that, like the wider economy, the public finances will face challenges in the months ahead.
The increase in tax revenues of over 30 per cent on the same period last year is strong, although exaggerated because taxes were depressed in the first quarter of last year due to the Covid lockdown. Even allowing for this, the buoyancy in corporation tax, income tax and VAT – boosted by higher prices, particularly on fuel – is notable. The Government will hope the strong tax trends continue and in the short term they should.
However, as the year goes on consumer spending will be affected as real incomes are hit by higher prices, particularly for energy. The jobs market looks strong for now; higher wages will boost income tax returns, though employment growth could be hit in some sectors. Corporation tax remains unpredictable though the regular warning that the State cannot continue to rely on ever-rising revenues here is more appropriate than ever.
Presenting the figures, Ministers Paschal Donohoe and Michael McGrath emphasised the challenges that lie ahead and the need for caution. Given the outperformance of the exchequer finances in recent years, they may be accused by the Opposition of crying wolf. But that would be a mistake. The challenges and uncertainties of the war are unprecedented. As the recent Central Bank quarterly made clear, a further spike in energy prices could hit growth even harder and give another upward push to inflation. Already the exchequer is facing new and unpredictable spending demands to compensate households, increase public pay and house refugees. And while the outlook for the exchequer finances may be fine for this year, the prospects for 2023 look uncertain. Difficult decisions on spending and tax now lie ahead.