The Government’s fiscal position two weeks before Budget 2021 is far better than feared despite the Exchequer deficit growing by more than €4bn in the last quarter.
Massive State spending to support the economy through the pandemic has put the balance €9.4bn in the red for the first nine months of the year, compared to €5.2bn in July.
However, a combination of strong corporate and income tax receipts has offset the spending somewhat, with total tax collected down just 3pc on last year at €39.6bn.
The result leaves the Government with some unexpected flexibility as Finance Minister Paschal Donohoe prepares to present the most significant Irish budget since the end of the financial crisis.
“The out-turn is now expected to be significantly better than was expected earlier in the year,” said Goodbody chief economist Dermot O’Leary. “Even with large deficits, this gives some wiggle room to announce further supports for businesses on budget day.”
Figures published by the Department of Finance yesterday showed voted expenditure to the end of September had reached more than €48bn -far ahead of profile and nearly 25pc higher than spending at the same time in 2019.
The increase in spending relates primarily to significant drawdowns by the Department of Health and the Department Employment Affairs and Social Protection to protect the population and economy from the effects of Covid. The Central Bank has estimated total Government support for businesses to exceed €10bn.
While it was expected that Covid spending would incur a large deficit following years of austerity and fiscal rectitude, the actual impact has been smaller than feared.
Income tax receipts are down just 2.1pc at €15.4bn even though the Covid-adjusted unemployment level – including those in receipt of Pandemic Unemployment Payments – reached as high as 23.1pc in June. The Department said most of the job losses fell outside the income tax net.
Corporation tax receipts were even ahead of schedule in September and for the year to date, bringing in €991m last month and €1.6bn since January. Non-tax revenue – mostly from Nama – was also €1.5bn higher compared to the same period last year, offsetting some of the Covid-related spending increases.
Yet it wasn’t all good news. The Exchequer figures also revealed a divergence of fortunes between the multinational sector and the indigenous economy, which has been hit hard by Covid restrictions.
Vat receipts were down a steep 19.9pc in the year to the end of September, reflecting a sharp decline in domestic economic activity as consumers bought less during lockdown.
By contrast, capital gains and capital acquisitions taxes remained broadly flat, indicating that asset values have remained relatively stable through the pandemic so far.
“Ireland’s K-shaped economic trajectory is clearly visible in the last set of Exchequer returns ahead of the Budget,” said Mr O’Leary. “Buoyancy in the multinational sector is contributing to the ongoing boom in tax revenues, while Vat is down sharply due to the closure of large tracts of the services sector.”
