ESRI: VAT returns may fall by almost €7bn due to coronavirus
Reduced household spending, due to restrictions imposed to fight the spread of the Covid-19 pandemic, could result in a decline of nearly €7bn in indirect tax revenues for the State this year, the Economic and Social Research Institute – or ESRI – has said.
The economic think-tank sees household spending taking a huge dent this year. But the knock-on effect to the exchequer – in terms of the money it takes in through indirect taxation - will be greater with the true extent depending on how quickly consumer life returns to normality.
“With a large portion of indirect tax revenues coming from areas of household spending that are most affected by the lockdown such as motor fuel, the fall in indirect tax revenues will be proportionally larger than the fall in overall spending. The indirect tax take is likely to be more than a fifth lower this year even in the most optimistic scenario considered,” according to ESRI research assistant Cathal Coffey.
In the friendliest scenario – where a Covid vaccine becomes available – the ESRI sees Irish household spending dropping by nearly 12% this year. Even that, it said, would result in a near 19% drop in indirect tax revenues; with areas most affected by the restrictions – like motor fuel - being taxed at higher rates than less affected areas like groceries.
In the most severe of the scenarios modelled, where a strict lockdown has to be reintroduced for a 12-week period from October, the ESRI sees household spending in 2020 falling by 20%. Overall, this, it said, suggests an indirect tax revenue fall of between €3.9bn and €6.7bn this year.
“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,” said ESRI senior research officer Conor O’Toole.
The ESRI is due to publish its latest quarterly commentary on the economy later this week.
Two sentiment gauges in the past week have shown a tentative improvement in consumer mood during May, albeit coming from the low of a complete collapse in April.
In its regular monthly survey, KBC Bank Ireland said that while this month’s improvement might suggest fatalism hasn’t taken hold, the ‘feel-bad’ factor still dominates Irish consumer thinking. This, it said, suggests consumers remain very worried about current circumstances and prospects.
It also said that nearly 90% of people expect austerity measures – typically reduced government spending and increased taxes - from future governments in the coming years.
In its version, Bank of Ireland said households remain “on edge”, with 75% of people now more likely to save money over the course of the next 12 months. Most households, it said, also expect house prices to fall.
Bank of Ireland chief economist Loretta O’Sullivan said the sudden and severe blow to sentiment “may have bottomed out”.
“Households and firms are hoping that as the restrictions are gradually lifted over the summer, the economy will begin the process of healing, which has led to somewhat less pessimistic expectations,” she said.
