Coronavirus: Tax take predicted to fall €14bn from impact of pandemic

The coronavirus crisis is expected to shrink the Government’s tax base by €14 billion this year, effectively wiping off three years of gains, the Department of Finance has warned.

The latest exchequer figures, which show a marked fall in tax revenues and a dramatic increase in spending, justify unprecedented Government measures to protect the economy and people’s livelihoods, Minister for Finance Paschal Donohoe has said.

The latest exchequer returns show the Government’s budget deficit – the difference between what it spends and what it collects in tax – swelled to €7.5 billion in April, more than twice the level recorded at this stage last year.

The year-on-year deterioration reflected the increased spending on health and social welfare as a result of the virus, also known as Covid-19.

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Laid off

The figures also showed that tax receipts for the four-month period were down by 0.6 per cent at €15.5 billion. However, the department warned that most of the hit to tax from coronavirus has yet to materialise. This is because VAT returns are not normally made by companies in April.

In addition, income tax receipts for April reflect payrolls in March before the economic lockdown, which saw hundreds of thousands of staff being laid off, was imposed.

On an annual basis, the full impact is expected to be in region of €13.9 billion, it said, with the loss in revenue most keenly felt through income tax and VAT channels reflecting the higher rate of unemployment and weaker consumer spending.

And even this is predicated on a return to growth in third quarter, which could be jeopardised by a second wave of infection.

“The full impact of the Covid-19 pandemic has still yet to be reflected in taxation receipts, with April receipts only partly encompassing the period of unprecedented economic and social restrictions introduced to combat the pandemic,” the department said.

The figures showed VAT receipts registered their biggest year-on-year decline, down 15 per cent at €4.2 billion. The sales tax was down 1,300 per cent at €86 million on a monthly basis reflecting the imposition of the lockdown.

Total expenditure for the four-month period was just over €20 billion. In year-on-year terms, this was up €3.8 billion or 23.5 per cent, reflecting primarily rises in health and social protection spending to cope with the pandemic.

Mr Donohoe said the Government’s Stability Programme Update, published last month, outlined a sharp deterioration in the public finances this year as a result of the Covid-19 pandemic.

“Today’s figures bear that out, with a fall in tax revenues and increase in expenditure,” he said.

“The Government is committed to continuing to provide support to ensure our economy recovers as quickly as possible from this crisis.”

Fianna Fáil finance spokesman Michael McGrath said the figures highlighted in stark terms the dramatic impact Covid-19 has had.

“The damage to some sectors will not repair itself and the State will have to make critical interventions to help businesses refloat and to start rebuilding private sector employment once again,” he said.

Sinn Féin finance spokesman Pearse Doherty said unless Government provides greater supports to families and businesses, “the economic shock will be deeper and prolonged, with less businesses able to restart and workers back at work”.

Unemployment measures

With the tax revenues falling and spending rising, the Government has forecast a budget deficit of €23 billion by the end of 2020.

This includes €4.5 billion in spending on the Government’s wage support and unemployment measures, which are due to expire in the middle of June, before the scheduled end of the lockdown. An extension of either or both schemes will result in a bigger deficit.

Peter Vale, tax partner at Grant Thornton Ireland, described the figures as “ sobering, although well flagged”.

“VAT receipts will continue to be hit hard by a combination a reduction in disposable income, fewer opportunities to spend and the deferral of VAT payments by businesses,” he said.

“Income tax will suffer as unemployment levels approach 20 per cent and many businesses defer the payment of income tax. While there may be some recovery before year end, both VAT and income tax will finish the year substantially behind the original target,” he said.