Reports of the economy’s death are greatly exaggerated

The positive-looking tax figures can’t all be explained away and have to be taken into account as we plan the exit from the lockdown. Of course, there are timing issues which help explain how little coronavirus seems to have affected the national tax take, but it’s not just about timing. It seems that, contrary to all the evidence, lockdown has left many businesses and individuals relatively unscathed. This is truly the strangest of recessions.

January and February 2020 were bumper months for tax collection and this puts a comforting sheen on the overall figures for the year to date. Corporation tax receipts in May were very strong, but because of the way corporation tax is collected, based on current estimates of profitability from large industry, many companies seem to be less affected by the lockdown then we might have guessed.

Income tax receipts are remarkably stable. This is despite having hundreds of thousands of people who were previously fully employed either benefiting from the pandemic unemployment payment or having their wages heavily subsidised. The Department of Finance explains this anomaly by commenting that “the progressivity of the income tax system has protected aggregate receipts to some degree”. What this really means is that it is lower-paid workers who have been losing their jobs or are having their wages subsidised by government. Lockdown, at least up until the end of April, did not hit the high rollers.

It did however hit the high spenders. Vat and excise duties are considerably down. A fall-off in purchases of luxury goods, cars and indeed new houses will have that effect.

What is perhaps the most striking about the May exchequer returns is that many businesses seem to have decided not to defer making tax payments. At the moment any business can decide not to pay over Vat or PAYE without interest or penalties, and there is no cheaper nor more readily available finance anywhere from any source. How is it that so many businesses, just within the last fortnight, opted to settle on time with the Revenue instead? I think it is reasonable to assume that it is the bigger businesses, with the biggest Vat and PAYE bills, that have opted to continue to pay tax on time because they can afford to.

The May exchequer figures are therefore better than most would have realistically expected and in ways run counter to the dismal predictions in recent economic forecasts. Well over a century ago, economics was dubbed “the dismal science” by Thomas Carlyle, the British historian and satirical writer, not because of its gloomy predictions, but because of its failure to explain or justify anomalies encountered in society. The current disruption in economic activity is not because of economic mismanagement or failure; it is a result of the change in behaviours prompted by legitimate concerns over public health. We should therefore be particularly wary of any economic forecasts generated when society is struggling with anomalies never seen before.

Many business sectors are trying to make the case for their release from lockdown earlier than others. They are right to do so as there is widespread hardship being experienced but opening up one particular sector in priority over another may not be in the best interests either of economic recovery or of public health. There was a harsh warning on the ongoing danger of the coronavirus from Sweden last week as health officials there conceded that fewer restrictions on movement and commerce had contributed to a high per capita death rate.

Paul Krugman, the American economist and commentator, put the conundrum most colourfully when he asked if it was the de facto position that Americans must die for the sake of the Dow index. In less emotive terms, however, the planning for re-opening the economy cannot be based solely by reference to industry sector. Some businesses can and have continued operating with remote workers and alternative supply and delivery arrangements. Size matters.