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Covid-19 pandemic: Fall in household spending could reduce tax revenue by 20%

Three different scenarios were analysed, going from best to worst.

Image: Shutterstock/ARIMAG

THE DECLINE IN household spending caused by the Covid-19 pandemic could reduce indirect tax revenue this year by more than a fifth, according to a new study published by the Economic and Social Research Institute (ESRI).

The research draws on real-time spending data in Ireland and international evidence to simulate the effects of the Covid-19 pandemic on consumption in Ireland in 2020 and indirect tax revenues, 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.

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 (eg. motor fuel) are taxed at higher rates than those that are less affected (eg. 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 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 €3.9 billion and €6.7 billion in 2020.

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.”

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Cathal Coffey, co-author of the report and a Research Assistant at the ESRI, said:

“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.”

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