Ireland experienced the largest fall in its tax-to-GDP (gross domestic product) ratio of any industrialised country last year primarily because of a falloff in VAT receipts, a reflection of the State’s strict lockdown measures and a temporary reduction in the standard rate of VAT, according to the Organisation for Economic Cooperation and Development (OECD).
The agency’s latest annual Revenue Statistics publication assessed the impact of the pandemic on government tax revenues.
It found the impact across the OECD was “less pronounced” than during previous crises, such as the 2008 financial crash, primarily because of government support measures.
The OECD average tax-to-GDP ratio rose slightly to 33.5 per cent in 2020, reflecting the fact that while tax revenues fell the falloff in GDP as a result of the crash in economic activity was greater.
In Ireland tax as a percentage of GDP fell by 1.7 per cent, the largest fall of any OECD country.The report said the decline was due to a fall in VAT revenues following the temporary reduction in VAT rates in 2020 and the impact of the pandemic in decreasing economic activity.
One of the key measures, announced in the Government 2020 July stimulus plan, was the temporary reduction in the standard rate of VAT from 23 per cent to 21 per cent.
The year-end exchequer returns for 2020 show VAT generated €12.4 billion last year, down nearly 18 per cent on 2019.
Smaller falls in personal income taxes, SSCs (social security contributions), property taxes and excises also contributed, the OECD report said.
In contrast to most countries, Ireland’s headline GDP grew last year on account of increased activity in the multinational sector, which is dominated by pharma and IT firms, which saw an increase in demand during the crisis.
The report suggests that government support measures across the OECD “contributed to the relative stability of tax revenues by protecting employment and reducing corporate bankruptcies to a considerably greater extent than in the global financial crisis in 2008-2009”.
The Irish Government took in €57.1 billion in taxes in 2020, just €2.1 billion down on the previous year. The stronger-than-expected result had a lot to do with the stability of income tax receipts, which were only 1 per cent down on 2019. Household income was bolstered by the pandemic unemployment payment (PUP) and the employment wage subsidy scheme.
The two schemes accounted for two thirds of the Government’s €13 billion Covid spend in 2020.
The OECD report found that many of the tax policy measures deployed by governments implemented to support households and businesses often had a direct revenue cost via reductions in tax liabilities, enhanced tax credits and allowances and reductions in tax rates.
“The sharp reduction in economic activity in 2020 reduced labour force participation, household consumption and business profits, further affecting tax revenues, although the shock was shorter and more sector-specific than the global financial crisis, contributing to its more muted impact on tax revenues,” it said.