Irish 2015 budget deficit may dip below 2% of GDP
The Irish budget deficit continues to decline and Department of Finance Exchequer returns published Wednesday showed red ink (general government items only) of €3.7bn in the year to end-August, down from €6.5bn a year earlier. Stripping out what is seen as a timing issue in one department, the deficit is €1.9bn (0.9% of GDP) better than the government’s original Budget 2015 expectations — it is likely to undershoot the original target of 2.7% of GDP by a significant margin to result in a likely outturn of below 2% of GDP in 2015.
Tax revenues in the first eight months were €1.4bn ahead of target mainly due to a jump in corporation tax payments.
The Department of Finance said tax revenue of €27.34bn was collected to end-August 2015. This represents a year-on-year increase of €2.43bn (9.8%) and is €1.4bn (5.4%) above target. Tax receipts for the month of August were €507m (22.0%) above target.
Income tax receipts of €11.22bn were collected to end-August 2015, a year-on-year increase of €639m or 6.0%, and is €146m (1.3%) above target.
The first eight months of the year saw VAT receipts of €7.96bn collected which represents an increase of €583m or 7.9%, when compared to the corresponding period last year and is €107m (1.4%) above target.
Corporation tax receipts to end-August were €3.29bn, which equates to a €907m (38.1%) increase when compared to the same period last year and is €912m (38.4%) above target. The over-performance in the year to date primarily relates to improved trading according to the department. Excise Duties totalled €3.3pbn to end-August, representing a year-on-year increase of approximately €223m (7.1%) and is slightly above target (up €24m or 0.7%). Excise receipts for the month of August amounted to €465m, which were €17m (3.8%) above target.
Overall net voted expenditure for end-August 2015, at €27.38bn, was 1.1% or €297m below target and €130m (0.5%) lower in year-on-year terms.
Total Exchequer debt servicing costs at end-August 2015 were €4.61bn.
David McNamara of Davy commented: "Exchequer returns for August show a further dramatic improvement in the public finances. The deficit related to the general government balance is now €2.2bn, or 1.2% of GDP, ahead of target year-to-date compared to a €1.6bn outperformance in the year to July. The improvement reflects sharp increases in tax revenues, particularly corporation tax, and further savings on debt interest. These data signal that the final 2015 deficit should come in well below 2% of GDP, compared to the government’s estimate of 2.3% in its spring forecasts.
On the revenue side, tax returns were €1.4bn ahead of target year-to-date, an improvement on the July outperformance of €893m. This was largely due to a €912m outperformance on corporation tax, up from €653m in July. Around €170m of this is due to one-off payments, with the Department of Finance putting the remainder down to improved economic activity.
Encouragingly, income tax was €146m, or 1.3%, ahead of target – a sharp pick-up on the July out-turn. VAT was €107m or 1.4% ahead of target, while excise duties were €24m, or 0.7%, ahead. PRSI was €224m, or 4.3%, ahead of target, which when added to other non-tax items, leaves total revenues affecting the deficit €1.6bn (+4.6%) ahead of target compared to an €1.1bn outperformance in the year to July.
Spending well in check but Health and Social Protection budgets deteriorating
On the expenditure side, overruns in Health (€283m) and Social Protection (€106m) were offset by savings in other areas. Other current expenditure savings left the total current out-turn €75m, or 0.2%, below expectations. Moreover, there were capital expenditure savings of €78m and big savings on debt interest of €396m, or 8.1% — in part due to the re-financing of expensive IMF loans early in 2015. This yields overall savings of €549m on the expenditure side compared to a €468m outperformance in the year to July.
So, a largely positive exchequer report, but persistent overruns in Health and Social Protection are a concern. The deterioration in the latter is rather puzzling given the improvement in the labour market this year. In our latest Davy Economics Monthly (issued August 31st), we discuss the looming demographic pressures which the government will have to provide for in its medium-term spending plans as Ireland’s younger and older age-groups expand significantly."
Dermot O'Leary, chief economist at Goodbody commented: "The budget deficit is primarily being closed as a result of strong growth in tax revenues and PRSI. In the eight months to the end of August, tax revenues grew by 9.8% yoy, and were €1.4bn better than expectations. Corporation tax continues to be the best performing category (+38% yoy, €912m better than expectations), accounting for the bulk of the overshoot year to date. Strong FDI flows over recent years can explain part of this performance, but the scale of the increase this year is surprising, and begs the question as to whether it may be down to one-off issues. Income tax continues to perform strongly (+6% yoy, €146m better than expectations), in line with the developments in both earnings and employment. Growth in VAT receipts of 8% yoy (€107m better than expectations) is also in line with what we are seeing in consumer spending trends.
Spending reduction mainly due to lower interest costs
The fall in interest costs (-6% yoy, €396m better than expectations) is reason for the lower than expected expenditure performance in the year to date. This is due to ongoing low borrowing costs and the benefits of the refinancing of expensive IMF loans. In other areas, gross voted spending is down 0.6% yoy (excluding a timing issue in the Department of the Environment). However, there are some spending overruns now being seen in both Health (€283m) and Social Protection (€106m). In relation to the former, latest reports suggest that this overshoot could reach c.€500m by the end of the year.
Steady progress, but job not done
There continues to be steady progress on deficit reduction in Ireland. However, with an expected deficit of 2% of GDP and debt level of 100% of GDP at the end of this year, it would be foolish for the government to think that the job is now done and abandon its prudent stance of recent years. Fiscal rules will go some way to avoiding such an outcome."
Pic above: Michael Noonan, finance minister.