First quarter exchequer returns may flatter to deceive

During Covid-19 it became the tale of two Irish economies – the part that was closed or restricted for much of the pandemic and the part that kept on trucking, dominated by multinationals. Next week’s exchequer returns for the first quarter will confirm that profits continued to grow for the multinationals through the pandemic, with another buoyant outcome for corporate taxes.

The worry for Ministers Paschal Donohoe and Michael McGrath, the financial double-act at the heart of government, is that the first quarter returns may flatter to deceive. There is first the issue of the corporate tax returns. Based largely on last year's profits, tax receipts from the big players look set to remain strong for this year. But what happens in 2023 when the impact of the war – and of higher energy prices and even possible energy supply interruptions – are reflected in corporate tax payments?

Inflation spiral

The second cause for caution is the inflation impact. Initially, this will boost revenues by increasing VAT returns, charged as a percentage of the sale price. But the Government looks likely to announce a cut in the VAT rate, if permission comes from Europe. Excise has already been cut. And, over time, inflation will also push up spending demands, notably in areas like public sector pay but also for State investment and general costs. Significant costs will also come from looking after refugees arriving here. Both sides of the ledger will be hit.

The final concern will be from the impact of the hit to economic growth from the war. As the Economic and Social Research Institute pointed out in its recent quarterly, all the main engines of growth will be hit – consumer spending, investment and exports. Lower growth in turn feeds through to lower revenues.

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The strength of the first quarter returns will increase calls for the Government to “do something” to protect people from higher energy costs. Some movement is likely, but Donohoe and McGrath – faced with concerns that the exchequer outlook could worsen as the year goes on – will argue for measures to be limited. It is a near-impossible political task and potentially more difficult than managing the public finances through the pandemic.