The growth in well-paying jobs is a budget boost, the Fiscal Council says

Strong growth in high-paying jobs has boosted state tax revenues dramatically and could do so for years to come, according to Ireland’s independent budget watchdog.

The Irish Fiscal Advisory Council, which normally warns of the risks of overspending, says the rapid growth in taxes paid by workers in 2021 meant that the share of income going to the Treasury fell from 22.4 per cent rose to 24.4 percent, the highest since records began in 1995.

Personal income tax receipts grew twice as fast as labor income, resulting in a result of 26.7 billion euros for the year, which was 4 billion euros or 17 percent higher than forecast in the 2021 budget.

The state budget watchdog attributed the unusual surge to job and wage growth in high-wage sectors like IT and finance, which have performed well during the pandemic.

The Fiscal Council also said these strong tax revenues are likely to last for several years and could result in personal income tax revenues 5 percent higher than government projections in 2025.

That shift towards income gains in higher-wage sectors could lead to continued strength in tax revenues, the Fiscal Council said.

The surprise uptick in income taxes and the growth of high-paying jobs could lead to calls for tax cuts or further shifts in tax bands to lower the effective tax rate again, as the increase in the effective tax rate means higher-income workers will bear a larger one even without changing the burden tax policy.

Likewise, the government has the opportunity to use the windfall to reduce debt or increase spending.

However, the Fiscal Council warned that there are risks that the recent increase in the effective tax rate could reverse it.

The study pointed out that the recovery from the pandemic is likely to result in lower effective tax rates in many sectors as people return to low-wage, low-tax jobs.

So far, while the boom in high-income employment has offset what’s happening at the bottom of the income distribution, there was no guarantee current conditions would last.

Recent tax returns show that tax receipts remain exceptionally strong, with higher than expected income tax, corporate income tax and VAT receipts as the economy continues to recover from Covid.

The deficit so far this year has shrunk to about €1 billion, well below estimates in the 2022 budget, as taxes came in 31 percent higher than expected.