Brian Cowen’s last budget as finance minister was delivered to a grateful public on 7 December 2007. Despite the swirls of early disquiet in the international markets, the budget contained no bad news. For 2008, day to day spending was to be hiked by 8% including an extra €1.5 billion in social welfare outlay.

Some €600 million in tax cuts were announced. Projected tax receipts were €49 billion, and provision was made for a small deficit of 0.9% of GDP. The state was in the happy position where the debt to GDP ratio was just 25%. Happy days. 

As 2008 unfolded it became clear that tax revenue would fall far short of budget. In May and June, tax revenue was 10% below expectations. During July to October, each month was 20% short. By November and December, monthly tax receipts were running 30% off kilter. 

Overall, the exchequer was down €8 billion in tax revenue in 2008 with the deficit being €13 billion. Compared to projections, income tax was 5% off budget as was Vat (14%), excise (9%), corporation tax (24%), stamp duties (38%) and capital gains tax (56%).    

The fall off in tax revenue related to Covid-19 in 2020 is of a different nature to 2008 because, 12 years ago, the decline in taxes collected occurred gradually over the year, at least to begin with.

The rate of decline accelerated sharply around June 2008 and the government’s immediate reaction was to propose, on July 8, some €440 million of spending cuts representing, as it turned out, just 3.5% of the year’s eventual deficit. Later in the year the October budget made room for €2 billion in 2009 tax increases including a special income levy of 1% for incomes up to €100,000 and 2% thereafter, an increase in Vat from 21% to 21.5%, and a hike in capital gains tax from 20% to 22%. 

Even in October 2008, two weeks after the bank guarantee was announced, the government was optimistic about the economy’s prospects for 2009, predicting a fall in GNP of just 1% and an unemployment rate of 7.3%. The actual outturn for 2009 was a fall in GNP of 12.5% and the unemployment rate in December 2009 stood at 13.1%. Perhaps it was not surprising, in hindsight, that a mini-budget was introduced 6 months later, which doubled the income levies, further increased capital gains and gift/inheritance tax to 25% as well as sharply increasing the tax take from PRSI. 

In this Covid-19-generated economic crisis, the public has learned about the possible exchequer effects at a much earlier stage than in 2008. After roughly one month into the lockdown, Paschal Donohoe, the finance minister, published the annual Stability Programme Update on April 21. The SPU must be put together every April by each EU member state and sent to Brussels for analysis and decisions – a new procedure introduced after the last financial crisis with the aim of preventing the next one.

Getting bad news early has its benefits. There are 7 full months left in 2020 to do something about the final exchequer numbers this year

Donohoe predicted that GDP will fall by somewhere between 10.5% and 15.25% this year depending on how long and how deep the economy remains locked down. A mid-April prediction of a €23 billion year-end exchequer deficit (based on a 3-month lockdown) was revised in mid-May to €30 billion. The government expects the country to bounce back next year with a 6% growth in national income and with unemployment falling to less than 10% by end 2021, down from the current “Covid-19 adjusted unemployment” rate of 28.2%.

Having declared a headline 2020 deficit figure of €30 billion already, the government has prepared the public (and the international lending community) for what hopefully will be the worst.  The deficit was at €7.5 billion at the end of April. The Department of Finance’s fiscal monitor published on 5 May showed that tax receipts for the first 4 months of the year were in step with the same figures for 2019 apart from a hit to excise duty and Vat from the tail end of March onwards.

The fall in excise duties can be accounted for by less petrol and diesel being imported since the lockdown. The May figures, being a Vat filing month for the March/April period, and with PAYE for April, will be the next important staging post for making 2020 predictions.  

Getting bad news early has its benefits. There are 7 full months left in 2020 to do something about the final exchequer numbers this year, lay the groundwork for the next years and protect the economy as much as possible.  

Tax measures to bridge the gap

Even on the limited information available from the January-April tax receipts, spending reports and the adjusted live register figures for end-April, the taxes to be most affected by Covid-19 are income tax, Vat and excise duties. All of these are linked to the lockdown. The earlier the lockdown is lifted, the earlier people can start, for example, drinking pints again (bringing in Vat, excise duties and income tax as well as a reduction in Covid-19 income support payments) or driving their cars (delivering Vat and excise duties on fuel). There will be simply be no substitute, tax collection wise, for getting the economy flowing again and as early as possible.

From the point of view of businesses, Revenue have played a blinder since this crisis began. Revenue were out of the traps early letting SME businesses know that payments of January/February Vat (due in March) and February PAYE could be deferred without attracting interest for late payment. The same treatment has been extended for the March/April and May/June Vat periods and the March, April, May and June PAYE dues.

As well as foregoing interest, Revenue have ceased all enforcement activity in respect of those taxes and assured businesses that non-payment of the taxes will not affect tax clearance certificates in place. Already, € 800 million in taxes have been deferred under the scheme in March and an additional €460 million in April. Revenue advise businesses to send in their tax returns on time (with the payments deferred if necessary) and, if the key accounting staff are not available to calculate the amount of tax owed, the business should submit the return in any case and do so on a “best estimate” basis. 

Revenue have announced (subject to legislation, ultimately, when the Oireachtas is fully functioning) that they will allow affected businesses to park, for at least a year, Vat and PAYE debt built up during the Covid-19 period.

The period of time covered by the scheme could be significant and will include:

A. the time a business is closed plus

B. the time, thereafter, a business is trading at a reduced level plus

C. two months on top. 

The debt will be deferred for 12 months, interest free, following the end of periods A, B and C for all Vat/PAYE liabilities built up during that time. Thereafter, the said tax liabilities may be deferred for a further unspecified period of time at an interest rate of 3% per annum (down from 10% normally). 

From the perspective of a business returning to trade, warehousing of tax debt will mean that (at the standard Vat rate), a business will, on re-opening, be able to keep an additional quarter of its turnover for a number of months (minimum two months) and defer paying same for at least a year.  Once the Covid-19 period has passed and the business has been normally trading for 2 months, the business will be expected to return to making Vat and PAYE payments as usual and with the benefit, in the meantime, of the extensive assistance (including rates waivers, Covid-19 employment scheme, tax deferments, loan payment waivers, grants, soft loans etc.) put in place or organised by the State.

The difficulty with tax deferral and tax warehousing being available without reference to the existing cash resources of the business is that taxes may be deferred for a long time which would normally be paid relatively quickly. Taxes paid in 2021 which a business actually had the ability to pay in 2020 will not show up in the state’s books in 2020 meaning that the money will need to be borrowed by the State to fund the gap. 

Incentive for early payment of taxes

Warehousing tax debt interest free for 12 months, and at a rate of 3% thereafter, might usefully be balanced with a facility and incentive for taxpayers, including businesses eligible for the warehousing, to pay taxes to the State in advance of the due dates.  A euro of tax normally due in 2021 paid, early, in 2020 will offset, straightaway, a euro of tax warehoused from 2020 and paid in 2021.

Why would a taxpayer pay tax in advance?  If there is an incentive.

For example, if Revenue offered taxpayers a 2% per annum interest payment calculated over the period taxes were paid early – and then paid/credited the interest to the taxpayer on the due date of the taxes, this would indeed be an incentive. Revenue already pay interest of c. 4% for overpaid tax but only in certain circumstances e.g. where Revenue demanded the tax and it was found that the tax wasn’t owed in the first place or where Revenue were slow in processing a tax repayment after a demand being made.

What is proposed here is merely an expansion of the existing facility, and at half the rate of 4%, and in the unusual circumstances where the State is agreeing to warehouse due tax debt because of Covid-19.

Interest received on overpaid tax is itself tax free, the rate of deposit interest in banks is non-existent (in fact, some banks are charging some customers a negative interest rate to hold funds) so there would be ample incentive for taxpayers who can afford to do so, to pay taxes in advance.  In those circumstances and in these times, there is perhaps scope for the State to encourage and incentivise early payment of taxes if for no other reason than to offset at least some of the income to be foregone in 2020 as a result of the warehousing of 2020 tax debts. 

Capital gains tax

Perhaps among the least productive measures the government could take to bridge the tax gap would be to increase capital tax rates. Raise tax, yes. Increase the rate, no. In 2007, when the capital gains tax rate was 20%, € 3.1 billion was collected. 2008 brought in €1.4 billion. By 2010, the haul had fallen to just €345 million.

All the way along, beginning in October 2008, the capital gains tax rate was increased progressively from 20% to its present 33% and it now brings in (2019 numbers) €1 billion per annum i.e. one third of the 2007 haul and at a time when (pre-Covid) asset values had returned to happy levels.

Fianna Fáil’s 2020 manifesto proposed a drop in the rate of capital gains tax to 25%. There is perhaps merit at an early juncture (a working Oireachtas will be needed for this) to dropping the rate to 25% in the medium term and as well, to stimulate asset roll overs and give people an incentive to make gains (and pay tax on the gains), the rate could perhaps usefully, for a limited period of 1 year, be pegged at 20%.

There is not a lot of time left to implement such a measure because 66% of CGT is paid in December (on gains made between January and November) and it may be July before a functioning Oireachtas is in place. Massively increasing the capital gains tax rate and, then, expecting more tax revenue as a result didn’t work prior to 1997 (when the rate was reduced from 40% to 20%) and didn’t work during the last downturn either.

Inheritance/gift tax

Up until 1999, gift tax was charged at a rate of 75% of inheritance tax. This practice ended when the tax rates for gift/inheritance tax was reduced to 20%. The rate differential on the taxation of gifts and inheritances encouraged persons to make gifts of their property during their lifetime rather than waiting until death and disposing of the assets by will.

This scenario encouraged early payments of tax. As asset values have declined due to Covid-19, now would generally be a good time (compared to, for example, last year) for people to make gifts of their assets and especially if there is an incentive (like there used to be in the past) for people to make gifts by way of a reduction in the CAT rate. 

Gifts also generate other tax revenue e.g. capital gains tax (which doesn’t arise on death) and stamp duty (which is not payable on inheritances) meaning that, for example, a targeted one year reduction in the gift tax rate (as opposed to inheritances) ought to benefit the exchequer over more than one tax head. 

Vat

The big Vat payment month is traditionally January. In 2019, for example, the €2.7 billion collected that month was about €700 million more than collected for the next Vat collection period. Vat returns are normally made 6 times a year i.e. every two months. Over a 12 month period, and excluding Christmas, the average monthly Vat take is in the region of €1-1.2 billion.  If the State introduced a 7^th Vat period, breaking up the November/December period into 2 periods of 1 month each, the December Vat take would be around €1.2 billion better off.

While that would, of course, lead to a lower Vat take in January, provided the 7^th Vat period continued to be available in the future years, then the State would receive a once-off benefit of €1.2 billion. Many businesses will prefer to keep the 6 Vat periods and not to pay monies over to Revenue just before the calendar year end as would be required if a 7th Vat period system was in place. So, again, there is perhaps room to incentivise a business to make a December payment of November tax liabilities.

If a business was in a position to, say, pay 20% Vat rather than 23% standard rate on November sales provided the Vat return and payment was made on time in December, same would undoubtedly produce the desired result and deliver an exchequer windfall. Black Friday occurs this year on 27 November and maybe the national accounts deserve a fillip after what will be a difficult year.

Settlement of existing tax appeals/open audits

In May 2019, Minister Donohoe informed the Dáil that there were then 3,652 tax assessment cases under appeal at the Tax Appeals Commission with an estimated value of €3.7 billion. 10 appeals related to corporation tax added up to €2.5 billion. As long as these cases remain under appeal (and, typically 50% of cases closed by the TAC each year are settled between Revenue/taxpayer without a hearing), those taxes cannot be collected and, therefore, won’t appear in the national accounts anytime soon. 

There is perhaps scope, this year more than ever, for an enhanced approach as between Revenue and taxpayer to the settlement and payment (if payment is ultimately agreed between the parties) of those taxes during 2020. 

A taxpayer who, if caught, doesn’t co-operate with Revenue initially by fessing up and paying over sums which, after an audit, are found to be due, faces having their details published by Revenue in the quarterly defaulter lists. A broadly similar (but far more restricted) system pertains in the UK. Per head of population and compared to Ireland, the UK publishes the names of only a small number of taxpayers.

One incentive for taxes under appeal to be settled, and indeed some audits which have not been concluded yet, (and without costing the taxpayer a cent) might be to suspend the operation of section 1086 (the section providing for the publication of the names and addresses of tax defaulters) of the Taxes Consolidation Act 1997 for a set period of time to allow sticky and hard to collect taxes to be drawn into the national exchequer during 2020 and, at the same time, make a large dent in the amount of tax appeals generally outstanding.

Raising tax rates?

So, what about actually raising taxes?  Well, effective income tax rates in Ireland (taken together with USC and PRSI) are already at high levels. Income tax payers have suffered the most throughout the last 10 years and more. For example, the income tax take in 2007 was just EUR 13.5 billion compared to 2019’s EUR 23 billion. Income tax’s share of 2007 total tax revenue was 28% compared to, in 2019, 38%. Fine Gael and Fianna Fáil’s framework document on the formation of a new government, dated 15 April, pledged not to introduce increases in income tax or USC.  The parties will perhaps, in the circumstances, need to abandon their respective plans to widen the tax bands and lower USC rates.

Irish Vat rates are not low (Germany and France charge 19%/20% respectively) but other EU states such as Croatia, Denmark, Hungary, Sweden, Finland and Greece have higher standard Vat rates in place. The old reliables (cigarettes, a pint, a litre of oil) are already highly taxed here. As customs duties are set by Europe, Ireland can’t influence the customs tax take. Ireland already has a property tax. Businesses already pay rates. 

Corporation tax has been the star of the show in recent years, increasing from €6 billion in 2007 to over €10 billion in 2019 and, now perhaps more than ever, the imperative will be to leave that regime just as it is.

As matters presently stand, a decline in corporation tax is predicted from 2022 onwards arising from developments in international tax law affecting multinationals who pay corporation tax in Ireland. In the wake of Covid-19, every country will be trying its best to capture additional tax revenues from mobile, digital businesses and no doubt the EU and OECD will be stepping up their efforts towards international tax harmonisation. Ireland will need to maintain and, where possible, increase its attractiveness for such businesses and their connected tax revenues.

*****

Economic incentives promised by the next government

Fine Gael, Fianna Fáil and the Green Party each proposed measures during the recent general election to encourage the growth of indigenous businesses. For example, each of the parties wish to make the research and development tax credit more attractive for small and medium sized enterprises to access.  Fianna Fáil proposed to expand the Employment and Investment Incentive Scheme (EIIS) by increasing tax reliefs on investments from €250,000 to €1 million. Fine Gael pledged to introduce a “small business tax package” aimed at SMEs.  The Green Party have proposed the re-introduction of a capital gains tax roll-over relief where the proceeds of sale are reinvested in early stage Irish start-up companies.  The ability to introduce each of these business tax incentives is not affected by the current Covid-19 situation.  Indeed, the incentives, and many more like them, will be needed more than ever.

Non-tax sources to plug the €30 billion gap

EU support programmes

The State’s annual tax revenue in 2019 was around €60 billion. There’s no way that a budgetary hole of €30 billion can be filled without significant borrowing. Thanks to the EU, not all the €30 billion will need to be made up by spending cuts, tax increases or open-market borrowings.

The European Union has recently put in place two lending schemes which will, no doubt, interest the government. The European Stability Mechanism (the Luxembourg-based successor to the main fund which lent to Ireland in 2010) has put in place a special instrument for euro-area member states called the Pandemic Crisis Support. The fund size is €240 billion, representing 2% of the GDP of the euro states.

Each state can borrow 2% of its GDP from the fund on a 10-year basis with an interest rate, effectively, of zero. By that metric, Ireland will be in line for €6.5 billion worth of support. The money must be spent, broadly speaking, on the health budget and linked to Covid-19 but nevertheless it constitutes an inward payment which ought to be greatly appreciated. The good news politically is that all member states are now pre-qualified to borrow from the fund – there will be no will they/won’t they visits to the country by foreigners undertaking lending due diligence or bearing dastardly austerity programmes.

The post-lending surveillance will be done by the European Commission so, therefore, there will be no Troika. The Commission will do its checking in the normal way it does it for every country i.e. there will be no ad-hoc visits, press conferences or other politically unpalatable hullabaloo. How does the money come to Ireland? Well, we apply for it. The ESM then borrows the requisite monies from the international markets using its AAA golden maverick credit rating and then lends the money to Ireland. The borrowing relationship would be between Ireland and the ESM. 

There’s no limit to the borrowing facility such as the 2% of GDP cap present in the Covid-19 fund.

The European Commission also has announced a lending programme called the SURE scheme (support to mitigate unemployment risks in an emergency) which will work in a manner not unlike the ESM scheme. The total value of same will be €100 billion and will be available to the 27 member states (unlike the ESM which is limited to the euro-area states). The money will ostensibly be available to support wage subsidy programmes, such as Ireland’s Covid-19 scheme. The EU will borrow the funds and on-lend them to the member states. The scheme requires a member state-level guarantee for the fund of 25% of the total borrowings.

Every state has to give the guarantee (proportionate to its economic size compared to other EU states) and Ireland will need its Oireachtas fully up and running to approve the state guarantee and get the scheme operational on an EU level. There’s no limit to the borrowing facility such as the 2% of GDP cap present in the Covid-19 fund. If Ireland, for example, borrowed according to the same proportion it could borrow from the ESM fund (i.e. €6.5 billion of the €240 billion fund), the borrowed sum from the SURE source would be some € 2.7 billion. The interest rates have not been announced but the EU has triple-A rating anyway and, backed by the further guarantees from other EU member states, the borrowing costs for the EU, and therefore the lending costs to member states, ought to be at zero interest rates.

Rainy day fund and Nama

In 2019, the Oireachtas passed the National Surplus (Reserve Fund for Exceptional Contingencies) Act which established a Rainy Day Fund. The fund contains €1.5 billion earmarked for use to offset future economic shocks. Before Covid-19, it was intended to be drawn down in case of a no-deal Brexit.

The €1.5 billion sitting in the rainy day fund came from the Irish Strategic Investment Fund which holds € 8 billion in assets and invests in Irish commercial ventures. The ISIF’s seed capital came from the old National Pensions Reserve Fund. The ISIF has recently been directed to use €2 billion of its capital to invest in Irish businesses affected by Covid-19 and the ISIF is not a rainy day fund.

While the actual rainy day fund seems tailor made to be used for Covid-19 spending, ISIF assets might perhaps be more usefully spent to keep affected large business operating and (as it has done for the past number of years) lever investment in indigenous job creation projects. Nama is due to wind itself up soon and early indications this year were that at least €2 billion of its €4 billion surplus will be heading towards the State’s coffers in 2020.

The Apple case

One non-tax source of finance which has been spoken about in recent days are the funds resting in the State’s coffers, totalling €14 billion, awaiting the decision of the European courts in the state aid case involving Apple Corporation. Both Apple and Ireland are appealing an EU Commission ruling that Apple owes Ireland that sum of money. Ill-informed chatter is of the view that Ireland could simply withdraw its legal case and, therefore, put its hands on the €14 billion.

That wouldn’t work because Apple is also an appellant in the case. We’ll just have to wait until the European court gives its final decision some time in 2021 and keep our fingers crossed until then.  Although, if Apple wanted to settle the case out of court for, say, €7 billion and the European Commission agreed to same, that would probably be okay too.   

Together with tapping the various EU and national funds tailor made for Covid-19, the government will have to consider the spending side of the equation at the same time as taxation. As outlined above, one of the difficulties attending the last economic crisis was that, looking back on things,  room existed to haul in the spending sails at an earlier juncture. There are 7 full months left in 2020 to take measures to control both Covid-19 and non-Covid spending and there’s no reason that time should be wasted.

*****

The lockdown has been in operation now for two months.  Every day, Tony Holohan and his team have better statistics to announce.  Phase 1 of the lockdown lift has started. The government have been upfront, and early, about the potential effects on the State’s 2020 tax revenue and economic position. There’s time between now and Christmas to take the measures needed to get the country and the economy back on an even keel and, hopefully, put Covid-19 back in its box.