The exchequer returns for the first quarter of the year show a continuation of strong growth in tax revenues, up almost 15 per cent on the same period last year. This is extraordinary growth at a time of economic uncertainty and means the official estimates for the exchequer finances this year will have to be substantially redrawn when revised figures are published shortly.
Given the uncertainty about whether this performance can be sustained, some new thinking is needed on dealing with the proceeds.
The over-performance of tax revenues has become something of a – welcome – annual story in recent years. This time it is driven by strong rises in income tax, VAT and corporation tax. The exchequer is in deficit for the first quarter only because ¤4 billion was paid into the National Reserve Fund – on an underlying basis the finances are in strong surplus.
Corporate tax continues to run well above forecast, at around ¤3.2 billion, compared to ¤1.9 billion in the same period last year. We are told timing factors are at play – and the real test of corporation tax and the impact of the tech slowdown will come in later months. Still, another year of outperformance is on the cards, even if the longer-term outlook for corporation tax remains uncertain.
RM Block
The Department of Finance has a difficult job trying to present the data. Adjusting for what it estimates are “excess” corporation tax receipts, it estimates that the exchequer finances are in an underlying deficit. But when the cash continues to roll in to the exchequer, pressure will remain to spend it.
The Minister for Finance Michael McGrath and his predecessor in the job, Paschal Donohoe, were correct to divert money last year and this year into a new National Reserve Fund. This can provide funds in case the exchequer finances hit a rocky patch for any reason. The Fiscal Advisory Council has also put forward a persuasive case for a longer-term fund to help pay for the State pension as the population ages. The finance minister has indicated he is considering such a move, though has presented it as a fund which could potentially meet wider investment needs too.
How this might all be structured remains unclear. However it can help to secure vital funding for investment and pensions in the years ahead. Too often in the past State investment spending was cut when the public finances tightened. We are paying the price now of a sharp cut after the financial crash, with resulting shortage of State-built housing in particular and catch-up spending required in areas such as health and wider infrastructure.
The current strong position of the exchequer finances provides an ideal time to press ahead with putting the right structures in place to avoid a return to the boom to bust cycles of the past.
