THE STATE FINANCES were buttressed in 2021 by a record €68.4 billion tax take that exceeded expectations, driven by strong corporation and income tax returns as the economy rebounded.
The exchequer is expected to record a deficit of €7.4 billion for the full year with government expenditure of €87.5 billion exceeding the State’s tax receipts, according to exchequer returns for December published by the Department of Finance this afternoon.
This compares with an exchequer deficit of €12.3 million in 2020.
The December figures complete the set for 2021 and give us a clearer image of the impact of the second pandemic year on the State’s finances.
The general government deficit was projected to be €13.3 billion for 2021 in the Budget, so today’s estimate was €5.9 billion lower.
The overall or ‘general’ Government deficit — as opposed to the exchequer deficit — includes non-exchequer spending and other transactions.
But today’s figures show the Government took in €68.4 billion in tax in the year to the end of December, up €11.2 billion (almost 20%) on 2020.
Income tax receipts — which were up €2,956 million or 17.4% on 2020 — remain the largest, most lucrative tax head.
VAT receipts finished the year at €15.4 billion, up 24% compared with 2020 reflecting the recovery in consumer spending.
Corporation taxes — up €3,492 million or 29.5% on the previous year — mostly paid by high-powered multinational companies in the pharmaceutical and tech sectors, also made a strong contribution.
Last year, the Government signed up to a global agreement to reform corporation tax, negotiated by governments at Organization for Economic Cooperation and Development (OECD).
Once implemented, the deal will, among other things, see Ireland’s world-famous 12.5% headline rate of corporation tax increase to 15%.
Concerns have been raised by the likes of the Irish Fiscal Advisory Council (IFAC) — the State’s budget watchdog — about the exchequer’s increasing reliance on corporate tax receipts, given the uncertain impact of the OECD reforms on foreign direct investment to Ireland.
Ireland’s corporate tax receipts has grown considerably in recent years and now accounts for about 20% of the State’s total tax take.
The Department of Finance has estimated that implementing the terms of the OECD reforms could eventually cost the State up to €2 billion annually.
Speaking at the announcement of the exchequer returns today, both Finance Minister Paschal and the department’s chief economist John McCarthy said the effect of those reforms would not begin to be felt this year but in 2023.
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The department has previously forecast that corporation tax would increase again in 2022 and McCarthy said today he sees no reason to revise that projection.
“There is nothing as yet that would suggest that, the main payers and we look at the top 10 who can have such a large portion of CT payments, they are all doing well,” he said.
If you look at the sectors that they are in IT, pharma, life-sciences, etc. Given the sort of stage the pandemic is in where there has been a shift of economic activity, each of those sectors would boost profitability further next year, boost exports profitability and that will support for next year an increase in corporation tax.
“Then you have the issue of the various international corporate tax changes, and they will start to kick in and that will work against us over I think from 2023 onwards.”
Given that position, Donohoe says he expects the economy to perform strongly this year once there are no shocks brought about by the pandemic.
“If we are successful in our efforts to suppress this disease, to keep our country healthy in 2022, the is a prospect of an exceptionally strong year in terms of getting our country back to work, and an even stronger performance in the national finances,” he said.
Asked whether he envisages a spring and summer with greater freedoms for society, Donohoe says he is “optimistic by nature”.
“I do believe we have a very strong story to tell about the progress that we have made in Covid despite the intense challenges many are facing today. But I believe there’s every prospect that as we move into spring and summer there are far better and far brighter days ahead.”