Key economic indicators remain deeply worrying, with the unemployment rate – accounting for people on the Pandemic Unemployment Payment – more than 26 per cent, and a €6.1 billion deficit in the exchequer finances emerging in the first five months of the year. The trends in the latest data are worthy of examination – they reflect the economic shutdown though, in some cases, are not as bad as might have been expected.
Income tax is clearly under pressure, yet despite the huge rise in unemployment, receipts did not fall as rapidly as anticipated in May. They did decline by 7.8 per cent, but given the fall in employment and the fact that many companies had the option to defer payments, a larger decline was expected. It may be that tax on higher earners, on average less affected than lower paid employees in sectors like retail and hospitality, is providing some support.
Corporation tax, the strong performer over recent years, was the one really bright spot and continues to surge, with receipts in May more than €1 billion ahead of the same month last year. This appears to relate to significant corporate reorganisations by major multinationals. Elsewhere there are big falls, notably in VAT, and the trend here will be closely watched as retailers reopen.
It would be a mistake to read too much into these figures. Minister for Finance Paschal Donohoe said that June data will be more telling. The emergence of a large deficit is striking, though the fact that the economy entered the crisis in good shape may provide some resilience in the months ahead.The decision not to cut income taxes in recent budgets also means the system continues to collect from middle and higher earners.
However, consumer and business confidence remains fragile and vulnerable and an uncertain road lies ahead. Higher Government spending and a move into deficit is the correct response to the economic and health crisis. Taxes will remain under downward pressure but, if the fall is a bit less than anticipated, it would provide some welcome support to the public finances.