State faces €6.9bn hole as tax takes tumble in Covid crisis

:: Vat plummets with falling sales

SHUTTING shops and strict travel restrictions could cost the State up to €6.9bn this year, expanding the already huge hole in this year’s budget.

The economic devastation being caused by Covid-19 could reduce indirect tax revenues by more than a fifth, according to new research from the ESRI, losing the State €3.9bn-€6.7bn in 2020.

Under the worst-case scenario, indirect tax would fall so far that corporation tax might approach or potentially overtake Vat as the State’s second biggest source of income.

Direct tax is by far the State’s biggest source of revenue – €23bn of the €59bn of tax collected here in 2019 was income tax.

Vat is the second-biggest money spinner for the State – in excess of €15bn last year thanks to a surge in consumer spending.

Adding in duty on petrol and diesel, motor tax and excise duties on alcohol and tobacco will take the total of indirect tax almost to a par with income tax.

With swathes of the economy locked down, the spending that drives almost all indirect tax stopped.

Conor O’Toole, a senior research officer at the ESRI, said household spending would fall this year by between 12 pc and 20pc, but the hit to the State finances would be disproportionately bigger.

Locking down the economy had hit the kind of spending that incurs higher tax, such as motor fuel, more than lower taxed segments like grocery shopping, the ESRI said.

It looked at three scenarios, including what would happen under a “new normal” with ongoing physical distancing; the potential hit from a “second

wave” of infections in late 2020; or a vaccine which allows normal economic activity to resume in the final quarter of the year.

In the ESRI’s most benign scenario, household spending will fall nearly 12pc this year.

In the most extreme case, where a strict lockdown is reintroduced for a 12-week period from October, household spending would tumble by 20pc, reducing indirect tax revenues by almost a third (31.7pc).

Based on that scenario, though not in the ESRI report, corporation tax would approach or potentially overtake Vat as the State’s secondbiggest source of income.

The State collected €15.11bn in Vat last year.

A 31.7pc cut to that would bring it exactly in line with the €10.4bn of corporation tax collected last year.

That would be ironic given high-level concerns – including at the Irish Fiscal Advisory Council and the Central Bank – that the State had become over-reliant on volatile and unreliable tax on corporate profits.

Corporate tax has doubled in cash terms since 2015 as a result of booming profits at global multinationals with tax bases here and a move of intellectual property into Ireland attracted by end tax schemes like the so-called “Double Irish”.

It is expected to be far less affected by Covid-19 than other tax headings because it is generally collected based on the previous year’s bill.

Meanwhile, research by Bank of Ireland shows that consumers may be slow to spend even once restrictions are lifted.

The bank found that 75pc of households say they are likely to save in the next 12 months, and seven in 10 people indicated that they expect to spend less on holidays this year.

Bank of Ireland’s Regional Pulses combine a mix of data to come up with a sentiment index.

The latest for May shows Dubliners are by far the most negative about their prospects.

Seven in 10 people indicated that they expect to spend less on holidays this year