Austin Hughes, chief economist, KBC Ireland commented: "Exchequer returns for February 2010 are broadly as expected.  They show tax revenues remain weak but efforts to rein back public spending appear to be bearing fruit.  Although the tax data may highlight some downside risks to some elements of the Government’s end year revenue and borrowing forecasts, the broad picture emerging is one which suggests the government’s planned budgetary adjustment remains on track.

With financial markets still keenly focussed on deteriorating budgetary positions in a range of countries, today’s data should provide some measure of reassurance to international markets that tough medicine is working in Ireland but more may be required.  The gap between spending and taxes suggests there will be further significant adjustments needed in Budget 2011. 

On balance, today’s tax data are slightly disappointing but not particularly surprising and not entirely devoid of encouraging signs.  Very poor tax returns a year ago were an important element in the decision to hold a supplementary budget in April 2009.  So, year on year comparisons should not be particularly difficult.  However, tax revenues were 17.8% lower in February 2010 than twelve months earlier.  This largely reflects the softness of Irish economic activity but it probably also owes a significant amount to severe weather in the early part of this year which would have weakened casual employment and depressed income taxes (down 11.8%).  The February returns also suggest a more fundamental ‘freeze’ in the property market continues (stamp duties down 33%) and also highlights again the impact of sharply weaker activity in recent years on corporate profitability. 

On a more encouraging note VAT receipts were notably stronger than expected last month (down 13% on the year but 4% ahead of official estimates).  Traditionally, February is a relatively unimportant month for VAT payments.  Indeed, the Department of Finance only envisaged 2.4% of full year VAT revenues would be paid last month.  It could be that continuing pressure on retailers is causing a greater incidence of late payments.  So, the February data could partly reflect a catch-up from January. 

Regardless of this question of timing, the surprising strength of VAT receipts in February also hints at least tentatively at some improvement in spending around the turn of the year.  This would mirror the somewhat stronger trend seen in consumer sentiment of late.  It should be recognised that these monthly data are volatile and poor weather and greater caution among consumers could result in somewhat weaker March VAT figures.  However, it may also be that these data are hinting at a ‘bottoming out’ process in consumer spending that might imply a healthier trajectory for the Irish economy and tax revenues later in the year."

Ulster Bank economists Simon Barry and Lynsey Clemenger commented:Revenue: Tax revenues in February came in broadly in line with the Department of Finance’s estimated monthly outturn. At €1.66 billion, receipts in the month were a modest €64 million or 1.3% behind plan. Indicative of the weak state of the Irish labour market at present, income taxes were the main drag on revenues in February, coming in €108 million behind. However, VAT receipts provided a partial offset, at €86 million ahead of plan.

February is not a big month for tax revenues, with roughly 5% of the annual total collected. Therefore, taking January and February together provides a clearer picture of the underlying revenue position in the year thus far. On this basis, receipts were down some 17.8% on the corresponding period in 2009, a slight deterioration on the 17.7% pace of decline in January. Based on the Department’s forecasts, an easing in the annual pace of decline to 16.6% was expected, thus there has been some slippage in terms of the revenue target.

Budget 2010 forecast tax revenue for this year at €31.05 billion, some 6% behind the 2009 outturn of €33.04 billion. While this target may look ambitious, base effects will be supportive of an easing in the annual pace of decline of tax receipts in coming months. In addition, a less weak economic environment than that envisaged by the government at Budget time may also contribute to a more modest drop in tax revenue in 2010. However, with only two months data available and 85% of the annual tax intake still due, it is too soon to make any firm judgement on the likely end-year position. While we take some comfort in the fact that revenues have been broadly in line in the year so far, greater signs of an improvement in tax receipts will be required in the months ahead if the government’s full-year revenue goal for this year is to be met.

Spending: In last month's note, we commented on the clear evidence of some early-year spending restraint across the major areas of voted expenditure.  One month on and this remains a prominent feature of the trends in the public finances. 

Notably, the annual rate of decline in capital spending accelerated to -25% in the January-February period, compared to -21% in last month's update.  The plan for the full year involves a projected decline in voted capital spending of 13%, so these past couple of outturns represent a much sharper pull-back.  However, given the vagaries of timing issues related to large project-type spending, it is not unusual to have relatively large deviations from plan early in the year, only for this to be made up over the course of the year.  So it would be wrong at this stage to conclude that there is a discretionary retrenchment occurring on the capital budget over and above the announced 13% reduction.

Turning to day-to-day spending, the annual rate of change at -8% in January/February remains well into negative territory, albeit compared with a sharper 12% fall reported in the January figures last month.  This translates into savings of some €567 million compared to the same period in 2009.  The greater the level of savings that can be generated from the current side the better in our view.  While it is early in the year to be drawing firm conclusions, we are encouraged that the run-rate of current spending is showing greater restraint than projected on the Government's latest forecast which envisages an unchanged level of spending compared to last year. 

Summary: Overall, the February Exchequer Statement reveals something of a mixed picture.  The early-year tax take has turned out to be a bit on the low side of our expectations.  However, we continue to take encouragement from the apparent discipline which is being applied to the management of day-to-day spending.