For now, at least, there is no end to the good news from the exchequer figures. It is appropriate both to recognise the strength of the figures and what they reflect about the economy’s performance, as well as maintaining some caution about what happens next.
An exchequer surplus of €5 billion after such a difficult year is remarkable. It reflects in part the phenomenal growth of corporation tax, but also the wider resilience of the economy and the jobs market in particular. VAT returns have been boosted to an extent by inflation, but consumer spending, while weakening in some areas in real terms, has held up despite the squeeze on incomes.
Tax revenues are unlikely to grow at the same pace in 2023, though it remains to be seen whether they will come under downward pressure. The jobs market slowed late last year and this is likely to slow income tax growth after a strong 15 per cent rise last year. Strong demand for labour in some sectors may provide some protection. The pressure on consumer spending is likely to show up in VAT receipts.
However, the big area of uncertainty remains corporation tax. The growth in revenues here – up nearly 50 per cent last year – reflects both the rise in real activity and profitability in the multinational sector, as well as the tax-driven restructurings of recent years. Now the tech companies, one of the big multinational sectors, see some squeeze on profitability in the face of an international downturn. This appears bound to have an impact on tax revenues, though how serious this might be is hard to forecast.
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The strong rise in corporation tax has given the exchequer significant leeway in recent years, including during Covid-19. There is no reason to expect these revenues to suddenly disappear, but it would be very unwise to bank on their growth rate continuing at current levels.
The strong surplus gives the Government some leeway heading into 2023, but due to the uncertainties about the outlook it needs to use that extra space wisely.