Surprise €930m corporation tax shortfall sends public finances further into red

A surprise €930 million shortfall in corporation tax receipts in October has pushed the public finances further into the red.

The latest exchequer returns show the Government’s budget deficit – the gap between spending and tax revenue – hit €11.7 billion last month. This was almost €10 billion worse than the deficit recorded at this stage last year.

While much of the year-on-year deterioration is explained by increased spending on wage supports and health arising from the pandemic, October saw a big and unexpected drop in corporation tax.

Receipts from the business tax came in at €198 million for the month, which was €930 million below what the Department of Finance had originally forecast.

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The department said it had recently become aware there would be an underperformance in October and this was taken into account in the projected out-turn for 2020, published in Budget 2021.

Repeatedly warned

Minister for Finance Paschal Donohoe said the shortfall underlined “the unreliability and unsustainability of corporation tax receipts”.

“As I have said many times before, we cannot rely on this revenue stream into the future; a fact that will be reflected in the department’s medium-term forecasts when published in the spring,” he said.

The Government has been repeatedly warned about the concentrated nature of Ireland’s corporation tax base with 80 per cent of last year’s record €10.9 billion total coming from a very small cohort of large US multinationals.

Cumulatively, corporation tax receipts to the end of October amounted to €7.7 billion, which was 11 per cent up on last year.

“There is a lot of uncertainty as to where the corporation tax figure will land for the full year,” said Peter Vale, tax partner at Grant Thornton Ireland.

“Today’s very disappointing figures will raise concerns that tax receipts in November, the key month for corporation tax, will be well behind last year. This could see the year to date surplus of circa €1 billion eroded completely,” he said

Overall, the latest returns show the Government took in €42.6 billion in taxes for the 10-month period, down €2.4 billion, or 5.3 per cent, on last year.

The department said approximately €550 million was retained by Revenue to facilitate payments under the Covid Restrictions Support Scheme (CRSS), the Government’s new support scheme for businesses impacted by the current restrictions.

Income tax

Income tax, which has proved remarkably resilient in the face of the Covid-19 crisis, generated €17 billion, which was 3 per cent or €576 million down on last year but still above the department’s revised profile.

“ Excluding the CRSS deduction, income tax receipts would have been marginally up on October 2019, continuing the relatively robust performance of income taxes this year,” the department said.

VAT, which has been hit hard by the restrictions, generated €10 billion for the 10-month period, which was €2.4 billion down on last year.

The €11.7 billion deficit was driven in the main by increased expenditure. Total spending to the end of October was €54 billion, nearly €11 billion or 25 per cent up on the same period in 2019.

The rise reflected “increased departmental drawdown” in response to the Covid-19 pandemic, the department said. Social protection spending, which covers the Government’s wage support schemes, was running at €15 billion in October, €6 billion or 68 per cent above profile.

Mr Donohoe said the latest exchequer returns highlighted that “the level of support given to businesses under the Government’s new CRSS is very significant and is having a material impact on the exchequer deficit”.

“Despite the cost, it is appropriate that Government steps in to help businesses during this time,” he said.