Apart from an expected mini-budget, the returns suggest, that the Government's target of €37 billion in tax revenue this year, is too optimistic.

The figures show an Exchequer deficit of €2 billion for the first two months of this year.

Tax receipts for the first two months were €5.76 billion, compared with €7.56 billion in the same period in 2007, a drop  of 24%.

VAT receipts were 17% lower at just under €2.25 billion, while income tax was more than 7% down at just over €2 billion.

The amount collected in VAT and excise duties was down by €755 million compared with the first two months of last year, a decline of 21%.

The fall in income tax results from a fall in employment while stamp duties and capital taxes were off a total of €613 million, relating to the contraction in house sales an investment activity.

Public spending rose €131million as social welfare spending was up €188 million in the first two months as a result of higher unemployment.

Detail

Pat McArdle, Chief Economist of Ulster Bank commented:

Taxes undershoot again in Feb …

The absence of the usual monthly profile of receipts and expenditure makes it difficult to analyse the Budgetary performance other than to say that it is not good. This was confirmed by the Government which, unusually, issued a Press Release with the February data saying that it “is already clear that tax revenues in 2009 are under pressure”.

To-date, the Dept has unveiled several tax estimates for 2009. These are reproduced below in chronological order.

Budget 07 – 6 Dec 2006 - €56.3 billion

Budget 08 – 5 Dec 2007 - €51.8 billion

Budget 09 – 14 Oct 2008 - €42.8 billion

Update 09 – 9 Jan 2009 - €37.0 billion

UB est – 3 Mar 2009 - €34.0 billion.

The difference between the first and the last is €22 billion which is a rough approximation of the amount to be raised by cutting spending, increasing taxes etc.

However, the most annoying omission is the monthly breakdown of the latest official tax revenue forecasts – these breakdowns, introduced by Charlie McCreevy to facilitate analysis, usually appear in January. In fact, the 9 January update, which was slipped out after close of business on a Friday evening, gives a round total only without even a breakdown into Income Tax, VAT etc.

We are thus forced to compare the Jan – Feb receipts with the corresponding period in 2008. Tax receipts for the two months were €5.8 billion as compared with €7.6 billion in 2008 and €8.2 billion in 2007. In fact, we have to go back to 2004 when receipts were €5.4 billion, to find a lower figure.

All tax heads contributed to shortfall …

The 2009 receipt was €1.8 billion below last year’s figure. All tax heads contributed to the shortfall. In absolute terms, VAT was the main contributor, down €452 million, CGT was down €375 million, and these were followed by Excises, minus €303 million, Corporation Tax, minus €241 million, and Stamp Duties, minus €219 million. Even Income Tax got in on the act, down €165 million.

It is probably more meaningful to look at them in percentage terms. Here CGT was the worst performer, down 72.6%, followed by Stamps 58.7% and Corporation Tax 37% - see table.

Property related taxes are still underperforming but the rot has spread to spending taxes such as VAT and excises which are now posting sizeable percentage and absolute falls. Clearly, the virtual absence of activity in the property and stock markets is affecting CGT and Stamps. However, the dramatic falloff in retail sales and other spending is increasingly impacting on VAT and excises. In the case of the latter, it is likely that VRT accounts for the vast bulk of the shortfall given that new car registrations are down 65% in the first two months.

The growing Income Tax decline reflects the worsening employment situation. It is still holding up reasonably well though receipts in Feb would have been boosted by the IT levy which yielded €50 to €60 million. However, Corporation Tax is a casualty reflecting the impact of the global recession on the big companies, including the banks, which operate here.

A further €4 billion in cuts now on the cards this year …

In the absence of proper information, one can only speculate as to the likely consequences for the full year. The fact that the Dept has pulled the blanket over its head tells you that it is not good. No doubt some will extrapolate from the two months’ figures and come up with horrendous numbers. This is dangerous as it pays insufficient attention to the pattern of activity last year which worsened steadily as the year progressed. Taking this into account, we reckon that the likely undershoot is of the order of €3 billion. This would take the 9 Jan estimate down to €34 billion, i.e. slightly above the receipt in 2004.

Current spend was up 3% but capital was down 7.1% in the first two months. Spending for the year is likely to overshoot by a billion reflecting higher social welfare given likely Live Register developments.

The total shortfall in the Budget numbers is, thus, of the order of €4 billion.

This is highly significant in the context of this evening’s Government statement that it will take the necessary action to ensure that the Deficit this year does not worsen from the forecast 9.5% of GDP. The implication is that further cuts of €4 billion are on the way – even more than €4 billion if we allow for the fact that almost a quarter of the year is gone.

The Government have just committed themselves to a task which is twice the size of the recent package of measures. On second thoughts, I take back what I said about the Department. Is there any more room under that blanket?/P>