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| Minister of Finance Brian Lenihan giving a TV interview at the Fianna Fáil Parliamentary Party gathering in Athlone, September 14, 2009. |
Exchequer Returns: Department of Finance public finance data issued this evening shows that the Exchequer deficit was €22.7 billion in the year to October. The Minister for Finance Brian Lenihan told the Dáil that forecasts show the overall tax take this year is back at 2003 levels.
Today's figures show that just over €26 billion in tax was taken in in the period, over €1 billion below estimates made in the April emergency Budget.
The Minister said total tax revenues were forecast for 2009 to be about €32 billion, compared with the €34.3 billion forecast in the April Budget. He also said the Government would have to borrow €22 billion this year to fund services.
Minister Lenihan said in response to a question from Labour's Joan Burton on why the tax take would fall €2 billion short of his forecasts last April, that due to wage reductions, half of all income earners were now out of the tax net. He also said the percentage paying tax at the top rate is down from 21% to 10%.
Lenihan also said that unemployment figures for the end of October would show that there was no increase in the Live Register, and he did not accept that unemployment would grow to 500,000.
The Exchequer deficit includes €4 billion for the capitalisation of Anglo Irish Bank and the €1.7 billion that was provided to the National Pension Reserves Fund.
The tax data shows that total receipts are 17% lower than in the same period last year.
Both income tax and VAT are almost 6.5%, or more than €600m each, behind target while capital gains tax is running more than 22% behind the April target of €235m.
€9.2 billion of income tax was received in the ten months while €8.95 billion in VAT was collected.
Stamp duties are 5.7% behind target at €729m. Corporation tax is running almost 10% ahead of expectations at €2.8 billion because payments were brought forward this year.
Total spending of €38.8 billion is just 1.4% or €567m below the April Budget projection.
However, there has been a 15% increase in social welfare spending, compared with last year, related to the rise in unemployment.
Commenting on today's figures, IBEC senior economist Fergal O’Brien said: "Tax revenues in October were again weaker than expected, and the pace of decline accelerated from that recorded in September. Tax receipts in the month were 20% lower than in October of last year – while the year to date receipts are now down almost 17%. The worsening trend is largely due to weakness in income taxes. This is particularly worrying in advance of the important November self-assessment returns. Unfortunately, we suspect that the tax revenue situation will be even further below forecasts once the details of these are available.
"The latest figures are a reminder that no time can be lost in the introduction of substantive measures to control the public expenditure position. Postponing the necessary adjustments in the public finances will only result in a protracted period of economic malaise, whereas decisive action on current expenditure in the December Budget will put the economy on a much sounder footing as the global economy picks up in 2010."
Chartered Accountants Ireland has called for a refocused debate on the issues facing our economy in the light of today’s Exchequer figures.
“There is now almost no prospect of total tax revenue reaching €32bn this year. Most worrying is the decline in VAT receipts, which now run more than half a billion euro behind targeted projections. It is now essential to plan for some domestic stimulus for the economy, through targeted VAT reductions,” said Chartered Accountants Ireland tax director Brian Keegan.
“We need to revisit our 21.5% VAT rate and reassess how effective it is in taxing domestically traded services. Consumers are not spending, yet €83bn is in deposit accounts held by private households in the State. Businesses such as restaurants and bars, along with other commercially provided services provide much needed jobs. They now need a boost,” said Keegan.
In addition, it is now totally clear that there is nothing to be gained by increasing income tax rates. The increases in the income levy should have yielded an additional €2bn in Income taxes, yet the income tax take between 2008 and 2009 will fall by more than €2bn. "This fall cannot be explained by the dreadful increases in unemployment alone. More, it signals that the increases have been counterproductive. The recent ICTU proposal for a 54% rate would increase the top tax rate to a prohibitive 69%," Keegan said.
“High marginal rates of tax reduce the incentive people have to increase their earnings, most of which are taken by the Government for no discernible improvement in services. They increase the incentive people have to leave the country and take their skills with them, thus impoverishing the nation as a whole. It also serves as a disincentive for higher earners from abroad from locating in Ireland, and importing the skills we need to weather this recession,” he concluded.
Davy chief economist Rossa White commented:
Forecasted full year tax shortfall of €2bn may be beaten; capital spending cutbacks are false economy
Revenue €1.07bn behind target versus -€2bn forecast
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Irish tax revenue is now €1.074bn behind target at end-October (tax receipts are down 17% year-on-year (yoy)). The government had pencilled in a €2bn shortfall for 2010 at end-Q3: that may be too high even though Capital Gains Tax (CGT) and self-assessment tax returns will be awful in November and December (the CGT payment date had been pushed back to mid-December anyhow). The shortfall as of September was €965m.
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The maximum general government deficit likely is 12%, taking into account scope for tax to surprise.
Headline income tax data affected by statistical quirk
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Income tax data look worse than they are. Note the €180m debit from income tax in the last two months as part of the new Health Insurance legislation (stamp receipts have been credited by a roughly offsetting amount).
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Also, Deposit Interest Retention Tax (DIRT) dropped €100m yoy in October.
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The underlying income tax yoy comparisons are -11%; -5%; -13% in the last three months respectively (taking account of the debit from Health Insurance, but not DIRT). The latest -13% may also suggest that initial self-assessment tax receipts were disappointing, although the bulk come through next month.
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There was some good news on excise (related to consumer spending) where the yoy decline in October was only 2.8%, the best this year.
Not good top see that capital spending is behind target; we hope it catches up with Budget by year-end
Ulster Bank economists Simon Barry and Lynsey Clemenger commented:
Tax revenues remain under pressure, but full-year shortfall may not be quite as large as last month’s revised estimate suggests …
At face value October was a somewhat weak month in terms of tax revenue. Both Income Tax and Stamp Duties undershot relative to the Department of Finance’s monthly profile published at the end of April. This weakness was partially offset by Corporation Tax and VAT running slightly ahead, with the total shortfall on the month of the order of €109m. In cumulative terms this leaves the tax intake for the year to October at just over €26bn, some 4% below where the April profile anticipated it would be.
Last month, the Department revised its tax projections for this year to incorporate a shortfall of €2bn relative to the April plan. This meant that the full-year estimate is now projected to be of the order of €32.4bn and not the €34.4bn previously forecast. We do not have a revised monthly profile that corresponds to the new annual estimate. However, when the lower full-year estimate of tax intake is considered, the October outturn may not have been as bad as the Department feared when it devised its latest target.
In this context, a comparison of cumulative tax receipts relative to where they a year earlier is useful. In the year to September, revenue was 16.8% behind the 2008 level. This deviation accelerated to 17.1% in October.
The Department’s latest estimate of total tax revenue of €32.4bn this year implies a 21% decline on the €40.8bn intake last year. Therefore, this forecast factors in a pronounced deterioration over the final months of the year. The weakening in October was incremental rather than pronounced, and offers some tentative hope that the Department’s revised full-year estimate may turn out to be on the pessimistic side. However, there is the important wildcard of Corporation Tax next month. This tax head has been volatile in recent months, which when coupled with the fact that payments have been spread over two periods in the year as opposed to solely in November, leaves the door potentially open for a significant tax shortfall next month.
The pull-back in spending continues to be dominated by lower expenditure on capital projects…
Total voted spending continues to be reigned in, with the October outturn showing expenditure down 1.6% compared with the Jan-October period last year. This is the third month running that total spending growth has been in negative territory in annual terms. Moreover, the 1.6% drop in the latest numbers represents a greater degree of restraint compared with previous months which had seen annual declines of 0.8% and 1.3% in August and September respectively. Not only is spending continuing to run below year-ago levels, but it is also still behind the monthly expenditure profile published by the Department in April. In total, voted spending is over €560m behind plan.
However, as we have been highlighting for some months now, the total masks significant differences in the two broad categories of spending. There have been some modest savings in current spending (of the order of €120m) but in keeping with the pattern evident since earlier in the year, the bulk of the spending shortfall is occurring on the capital side. The cumulative shortfall is now at €475m, or 8.7% of planned expenditure. A month ago the shortfall in this area was €408m, so far from making up the shortfall in capital spending, the latest numbers point to additional slippage. It is possible that the final two months of the year may see some late-year catch-up relative to plan, but we are running out of months for the shortfall to be made up. While spending discipline is certainly a necessary part of the fiscal consolidation which is underway, it would preferable to see current spending playing a more significant role in the mix of restraint.
On a departmental basis, the Department of Education & Science continues to show the largest shortfall in capital spending, with its €523m of spending so far this year running €140m behind target.
Overall, while there was undoubtedly some slippage in October tax revenues, the weakening looks to have been modest. It may even be the case that the situation come the end of the year is not quite as bad as the Department of Finance had signalled in last month’s updated projection. However, as November is the most important month for tax revenue it will be critical in shaping the final position for the year as a whole. Offsetting the slide in tax receipts somewhat is the ongoing reigning in on the spending side, with the pull-back continuing to be dominated by lower expenditure on capital projects.
