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 an ESRI study published today.

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.

It sets out three three scenarios:

• a ‘new normal’ with ongoing physical distancing,
• a ‘second wave’ of infections in late 2020,
• 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 per cent.

This would result in a proportionally larger fall in indirect tax revenues of 18.7 per cent as those areas of spending that are most affected (e.g. motor fuel) are taxed at higher rates than those that are less affected (e.g. groceries). 

Scenarios

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 per cent, reducing indirect tax revenues by almost a third (31.7 per cent).

This suggests a revenue reduction of between €3.9 billion and €6.7 billion in 2020.

Co-author Conor O’Toole 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.