Corporation taxes show State finances can ride Covid-19 budget shock, writes David Chance
A €6bn hole in the budget may look like bad news, but in fact the reverse is true - Ireland’s tax base is holding up despite the worst recession in history and a million-plus people dependent on the State for at least part of their wages.
To be sure, welfare payments surged by €5bn-plus and pushed spending for the year to May to €26bn, but we knew that was going to happen, it was fully costed in the revised budget forecasts issued by the Department of Finance when Covid-19 hit.
From now on, with construction workers back on site and others set to start returning to work, those payments will only start to fall, so in one sense, albeit a narrow one, much of the red ink in State finances is over.
What was more interesting was that company taxes not only held up, but actually surged.
That reflects one of the huge strengths of the Irish economy, its ability to attract multinational companies who pay their taxes here and contribute eight out of every ten euros in corporation receipts to the Government.
So, the likes of Apple, Microsoft and Google whose earnings have been robust, are a major boon as the State seeks to boost the economy through this unprecedented crisis.
In May alone, tax payments by companies doubled from a year ago to €2.6bn and cumulatively they were €1.7bn ahead of the same period last year.
The Department of Finance notes that we need to exercise some caution as to whether this will continue as the May corporation tax payments represent the last month in which the money due to the Exchequer from 2019 has come in.
That said, the performance of Apple and other tech giants through the crisis gives us confidence that the revenue stream will continue.
Despite interruptions to its supply chain as Covid ravaged China and started to take its toll on Europe, Apple posted quarterly revenue of $58.3bn (€50bn) in the first quarter of this year, up one percent from last year.
Crucially for Ireland, which is a revenue centre for the American giant, international sales accounted for 62pc of the quarter’s revenue.
That would appear to indicate that the robust performance in company tax receipts from this industry sector will continue to boost Irish Government coffers, to reduce the overall deficit and cut the amount of money the State needs to raise on financial markets.
In other words, not only is the Government right to support workers and the economy, it has the firepower to keep on doing as the need arises thanks to multinational companies paying their taxes here.
Of course €6bn is a big hole in State finances, but we are very far from entering an era of financial crisis austerity.
The State has “plenty of fiscal capacity” to keep borrowing to support the economy during the pandemic crisis, but the country needs to plan for stronger recovery than is currently anticipated, according to Robert Watt, the secretary general at the Department of Public Expenditure and Reform.