The latest ESRI research paper, entitled The Effect of the COVID-19 Pandemic on Consumption and Indirect Tax in Ireland sheds some light on the effect COVID-19 has had on household expenditure and exchequer revenue, and how these are expected to be impacted going forward.
The figure below shows the impact of COVID-19 on the estimated expenditure of all households for the year 2020. 38% of expenditure was expected to be spent on essential goods which continued to be purchased relatively unhampered due to COVID-19; more difficulty is faced accessing restricted goods due to the pandemic.
The paper states that the percentage of expenditure on essential goods is greater in households with lower incomes. The paper emphasises that “these types of families may find it more difficult than others to weather a sustained income shock, in particular since they – on average – have less savings to draw on”. Separately, lone parents, single retirees, and single individuals without children are shown to spend a greater proportion of their income on essential goods. Renters are also shown to spend a greater proportion of their income on essential goods than are owner-occupiers – with the difference between proportion of income spent on essential goods for private renters and owner-occupiers being 8.8%.
The paper outlines three scenarios for the country going forward: firstly, a return to a “new normal” with continued social distancing as outlined in the government’s roadmap to reopening the economy; second, the return of extensive lockdown restrictions should a severe second wave of COVID-19 spread throughout the community; and thirdly, the development of a vaccine which facilitates a return to normality in the fourth quarter of 2020. The paper estimates the impact each of these scenarios would have on consumption and indirect tax revenue (such as VAT) for the year 2020. The table below outlines the estimated impact of COVID-19 on the annual consumption of different kinds of goods. The paper states that the small impact a vaccine would have on annual consumption relative to that of the “new normal” is representative of the fact that the “spending shock” has already occurred – it was felt in March and April during the most restrictive periods of lockdown.
The paper goes on to estimate the impact of COVID-19 on indirect tax revenues, as can be seen below. However, I must emphasise that these figures relate to the year of 2020 alone, it does not make any assumptions about tax revenue beyond 31st December 2020. The column on the left represents indirect tax revenue vs. 2019, this is why the 2019 figure is at 100 across all sectors. Expenditure on fuel and non-durable household goods, e.g. haircuts and tobacco, is estimated to remain constant under any scenario, but clothing, transport and durable household goods, e.g. televisions and gardening equipment, are to decrease sharply under a “second wave” scenario. These estimates suggest that the impact any vaccine will have on the collection of indirect taxes for the year 2020 is minimal – a reduction of €4.3 billion under a “new normal” scenario vs. €3.9 billion should a vaccine be developed before the fourth quarter of the year. The real impact will be felt should there be a severe second wave of COVID-19, which would lead to an estimated €6.7 billion decrease in indirect tax revenue. It is noteworthy that these do not include direct tax revenues such as income tax or USC, which are also going to see a decline for the year 2020.
This paper provides further evidence that Ireland’s economy has experienced a sharp decline across the majority of its economy due to COVID-19. In its conclusion the paper states, in sentiments which have been reflected by this website, that the Pandemic Unemployment Payment and Temporary Wage Subsidy Scheme played a major role in sheltering low-income workers and renters from the negative impacts of COVID-19 job losses.
In my view it is clear that a second wave of COVID-19 would further devastate the Irish economy and therefore all efforts should be made to ensure that the “new normal” scenario bears out in reality. This ESRI paper is timely in its publication, as discussion around reduction of the social distancing guidelines from two meters to one have been prominent in the media in recent days. Due to the minimal impact on consumption and indirect tax revenue that the development of a vaccine would bring about, as suggested in this paper, I would be hesitant to endorse such a view. From a purely economic perspective, the increase in consumption associated with a change to social distancing guidelines does not justify the risk associated with a second wave of COVID-19 spreading throughout the community. The government’s plan for a phased reopening of the economy must be adhered to; if not, the impacts could be dire.
All figures and tables in this article are courtesy of the Economic and Social Research Institute (ESRI).