State coffers hit by decline in spending by households

THE decline in household spending caused by the Covid-19 pandemic could cost the State 20% through a decline in VAT and other indirect tax revenue this year, a Government-funded study has found.

The State will lose billions, and will find it very difficult to have a balanced budget this year.

The worst-case scenario, based on a hypothetical secondwave lockdown in October suggests a reduction of between €3.9billion and €6.7billion in

House prices could drop 12%

2020 – almost one-third.

The study was published today by the Economic and Social Research Institute (ESRI).

In the most benign of these scenarios, where a vaccine becomes available, the research suggests household spending will fall by nearly 12%.

This would result in a proportionally larger fall in indirect tax revenues of 18.7% as those areas of spending that are most affected (like motor fuel) are taxed at higher rates than those (such as groceries) that are less affected.

In the most severe scenario, where a strict lockdown has to be reintroduced for a 12-week period from October, the research suggests household spending in 2020 would fall by 20%, reducing indirect tax revenues by almost a third (31.7%).

This suggests a revenue reduction of between €3.9billion and €6.7billion in 2020.

The research draws on realtime spending data in Ireland and international evidence to simulate the effects of the Covid-19 pandemic.

It is based around considering three scenarios: a ‘new normal’ with ongoing physical distancing, a ‘second wave’ of infections in late 2020 and a vaccine which allows normal economic activity to resume in the final quarter of the year.

Conor O’Toole, co-author of the report and a senior research officer at the ESRI, said: ‘The findings of this study point to major reductions in household expenditure this year, given the necessary restrictions to suppress the spread of Covid-19.

‘A new normal, with ongoing physical distancing, would lead to a 13% fall in spending while a second wave may see spending cut by one-fifth.’

Last week, the ESRI had more grim news when it forecasted that house prices could drop by as much as 12% by the end of next year – which for the current average house price of €290,000 means a fall of €34,800.

Current average annual income is €41,000 – just €6,200 more than the predicted price slump.

Knowing prices are going down and with unemployment ballooning to record levels of almost 700,000, buyers may be reluctant to make firm offers.

Homeowners campaigner David Hall, of the Irish Mortgage Holders Organisation, said: ‘We don’t know what’s going to happen yet in relation to prices. When they bottom out will people get money to buy houses?

‘I have heard that people are effectively being asked to reapply for mortgages post Covid-19 to confirm that the business they’re working for will still be in business, so the whole thing is different.

‘Mortgages are based on evidence of income, therefore if you’ve been on a Covid payment for the last couple of months – either the €350 payment or 70% of your pay – it’s not going to be until September before anyone is back at work or not, so it’s not going to be possible to see how much of a mortgage you can afford,’ he said.

‘Mortgages are based on income’ news@dailymail.ie