Tax revenues send some worrying signals
Employment data and tax revenue data are arguably the two best indicators of what is going on in the economy.
As business conditions improve, more employees will be taken on and that is exactly what has been happening over the past couple of years.
Every time we engage in an economic transaction we end up paying some type of tax for the privilege of doing so. The more economic transactions we undertake the more tax we pay and vice-versa.
On the face of it the Exchequer returns for the first quarter of the year look positive. An Exchequer deficit of just €903 million was recorded, which is €266 million lower than the first quarter of last year. Total tax revenues were €356 million or 3.2 per cent ahead of last year, which is also quite good.
Exchequer Returns Q1 2017
Source: Department of Finance
Of some concern is the fact that Income Tax receipts are just €62 million ahead of last year, representing an annual growth rate of just 1.4 per cent. More surprisingly, Income Tax receipts are running €180 million behind what the Department of Finance had expected. This is surprising because all of the labour market indicators are pointing towards a very positive background. We only have employment data to the end of December, but they were very positive. Employment increased by 3.3 per cent in the year to the end of December to reach 2.048 million. All 14 sectors of the labour market recorded positive growth, which is the first time in a long time that this has happened. More recent labour market data show that the number of unemployed declined by 10,100 in the first quarter of this year and the unemployment rate fell to 6.4 per cent of the labour force, which is the lowest rate since June 2008.
The quandary is how these strong labour market indicators tally with the relatively disappointing Income Tax returns. The most obvious conclusion is that many of the jobs being created are relatively low paid and following changes to the USC in the past couple of budgets, many of the new employees may not be in the USC net at all or are paying very little based on earnings.
This is all totally consistent with the behaviour of the consumer at the moment. While retail sales are growing, there is still a large gap between strong volume growth and much weaker value growth. In the first two months of the year, the value of retail sales was up by just 0.2 per cent and the volume of sales was up by 2.3 per cent. The gap between the value and volume metrics is indicative of a consumer sector that is still very resistant to higher prices. Other signs of consumer caution are presented by the latest data on new car registrations. New car registrations in the first three months of the year were 8.3 per cent down on the same period in 2016, but the outcome would have been considerably worse but for a surge in registrations in the dying days of March.
All in all, it is clear that the Irish economy continues to enjoy a strong statistical recovery, but for the majority of businesses dealing with the still-stretched personal sector, it remains a challenging environment. It is one thing writing lots of new business, but the bigger challenge is trying to convert those increased volumes into revenue. It has to be hoped that as the recovery continues, the quality of the jobs being created will improve.
The Income Tax returns also show us that the burden of Income Tax on those who work and who are in the tax net is still very high. This year, Income Tax payers will pay over €20.2 billion in Income Tax and this will account for around 40 per cent of total tax revenues. The equivalent figures back in 2006, when we had roughly the same number of people at work in the economy, were €12.4 billion and 27.2 per cent of the total tax take. Income Tax payers are labouring under a very heavy burden in this country.