Marc Coleman is founder of Octavian Research, an economic research publication and public affairs consultancy. In this guest blog, he looks at the impact a reduced tax take might have on borrowing costs
When looked at first, the overall fall in tax receipts in the first two months of 2021 does not look too bad: Given the year that’s in it, a fall of 9 per cent in total taxation and a fall of 6.9 per cent in total taxes excluding corporation taxes suggests that, once lockdown is over, a return to revenues prevailing before the Covid-19 crisis looks possible.
On closer inspection, the trends are far more worrying. The external export-oriented side of our economy is leading to the headline rate of Gross Domestic Product (GDP) actually rising last year by 3.4 per cent. This is reflected in the detail of exchequer returns which shows a strong increase in Customs Duties of 30 per cent in the first two months of 2021 compared to 2020.
Capital Acquisitions Tax – a tax affected by the real estate and professional services side of our economy – showed even stronger growth at 33.4 per cent. But for indicators of the domestic economy – which drives over two thirds of tax receipts – the position is dramatic and negative: Corporation taxes fell in the period by 39.9 per cent, Stamp Duty by 25.4 per cent, Excise Duties fell by 14.8 per cent and VAT by 13.1 per cent. Falls in retail sales (see below) are further proof of divergence between our domestic and export economies.
Income taxes held up, even rising by 1.4 per cent in the year. But – mainly by the indirect effect of averting permanent lay-offs – this is being sustained by a level of borrowing that cannot continue much longer.
With tax revenues down by €14 billion in the twelve months to February compared to a 2019 revenue tax of €59 billion the implied structural fall of almost one quarter in the revenue base cannot be sustained at a time when Total Gross Voted Spending is rising by 20 per cent without bond market implications ensuing.
At €225.8 billion as of end February 2021 (National Treasury Management Agency data), Ireland’s Gross National Debt is heading to exceed a dangerous 120 per cent threshold of modified Gross National Income (GNI*) in 2021 (it had been already forecast in the Budget 2021 Economic and Fiscal Outlook to reach 114.7 per cent of GNI*). That threshold is one where debt dynamics and the state’s repayment capacity becomes increasingly exposed to the rate of economic growth and also to political stability concerns.
But when could bond market tremors kick in? There are no signs of them thus far. But retail sales figures suggest these fiscal trends will be with us for at least a few more months.
And if the roll out of vaccine is significantly delayed in to the summer and confidence in the capacity of the economy to re-open fully by autumn is undermined then neither the downward tax nor upward spending trajectories will be capable of correction without severe political implications. And falls in business confidence, investment and jobs.
It is hard to end on a positive note, but there is one worth emphasising: As a share of Gross Domestic Product (GDP) Ireland’s Gross National Debt remains significantly lower than as a share of GNI*. The issue for Ireland is the relatively low tax yield from much multinational activity that makes up the difference between GDP and GNI*. As we called for in “An Economic Response to Covid-19” last April, a well organised and implemented strategy of multinational – SME collaboration can raise the employment and tax richness of this activity and make the lower GDP measure of our debt more appreciated by ratings agencies as a sign of our ability to come out of this crisis with a debt burden that is manageable. As a rake of electoral cycles approach from 2023 onwards, the ability of increasingly fragmented governments to service their debts could bring a lot of chicken’s home to roost. Ireland’s fiscal policy will need to start adjusting for that risk this year. The sooner, the better.
Marc Coleman (email@example.com) is founder of Octavian Research, an economic research publication and public affairs consultancy that wrote the world’s first researched strategy response to the Covid crisis (download www.octavian.ie ) and currently produces the world’s first weekly Covid-19 specific economic and business client research note (now in its 32nd edition). He works with leading clients across industry, financial services and government agencies to produce policy influencing research and publications. He has authored five influential books on the current and previous recoveries and worked as an economist with the European Central Bank, Department of Finance, as Economics Editor of the Irish Times and Newstalk 106fm, a Sunday Independent columnist. He is a leading speaker, event host and policy analyst.