From left to right: Jean-Claude Trichet, President of the European Central Bank, Brian Lenihan, Irish Minister for Finance and Jean-Claude Juncker, Luxembourg Prime Minister, President of the Eurogroup, at the monthly meeting of Eurozone finance ministers, June 07, 2010.

The Irish Exchequer deficit at end of July 2010 is €10.2bn. The Department of Finance says this compares to an Exchequer deficit of €16.4bn in the period to end-July 2009. In overall terms, this is generally in line with Department of Finance expectations and the Budget Day targets for 2010 remain valid.

Tax revenues are just over €1.5bn or 8.2% below the corresponding period in 2009. Net voted expenditure is just over €1.9bn or 7% lower. The year-on-year difference in the Exchequer deficit is primarily explained by €3bn payments to both the National Pensions Reserve Fund (NPRF) and to Anglo Irish Bank which were made in 2009.

In total, just under €17.2bn in tax receipts were collected in the first seven months of the year. This is €247m or 1.4% below target. 3 of the "Big 4" tax-heads - - VAT, corporation tax and excise duties - -  performed to expectations in the first seven months of the year. While the fourth - - income tax -  remains behind target at end-July. The Department said it is important to note that it came in ahead of its monthly target for July.

The Department said the Budget Day forecast for tax revenues of just over €31bn in 2010, or a year-on-year decline of 6%, remains achievable although there are significant targets to meet in the months ahead, particularly in the last quarter of the year and taxes will continue to be closely monitored.

The Department said that at end-July, total net voted expenditure at some €25.4bn is just over €1.9bn or 7% below the same period in 2009. This year-on-year decline is largely the result of expenditure control decisions taken by Government. Current expenditure is on target at €23.2bn. It is €695 million or 2.9% below the corresponding period in 2009.

Capital expenditure at end-July, at €2.2bn, is down some €1.2bn or 35% year-on-year. It is €660 million or 23% below target. A significant proportion of this shortfall is due to timing and operational issues and it is anticipated that capital expenditure will pick up in the latter part of the year.

End July Exchequer Statement

End July Analysis of Voted Expenditure

End July Analysis of Taxation Receipts

Irish tax receipts

Davy chief economist, Rossa White, commented:

Tax revenue still marginally behind profile; likelihood of positive surprise diminishing

Tax revenue was 1.4% or €247m behind at end-July

• Irish tax revenue continues to lag the official estimate after seven months. The gap closed marginally month-on-month: at end-June revenue was 1.6% lower than the Budget target.
   

• It is perhaps disappointing that non-income tax revenue is only 0.4% ahead of profile at this stage, compared with 0.6% a month ago and 0.9% at the end of May. Fortunately, income tax revenue is inching closer to target albeit that it remains €290m or nearly 5% behind initial expectations.
   

• Encouragingly, tax revenue that is dependent on consumer spending was almost exactly in line with expectations at €8.97bn after seven months. It tallies with the retail sales data showing spending up 1.1% quarter-on-quarter in each of Q1 and Q2, but more or less flat in nominal terms.  

Limited scope for tax revenue to beat full-year target

• Earlier in the year, we thought there was a good chance that the government forecast of €31bn in tax revenue for the full year was too low. We still expect tax revenue to eclipse expectations, but upward momentum is slow at this point. Nominal GNP will decline by about 0.5 of a percentage point more than we had anticipated at the start of 2010. In turn, even though the second half will produce faster growth than H1, revenue may only reach €31.5bn for 2010. 

Current spending is under control, but capital is lagging

• Current spending is firmly under control: after seven months the outturn was €11m (-0.05%) below target.
   

• But capital expenditure is lagging well behind. Only €2.23bn has been spent versus a target of €2.89bn. Usually, spending is loaded towards H2 and catches up with target. But private construction activity is so thin that front-loading would be a better idea.

NCB Stockbrokers economist, Brian Devine, commented:

In total, just under €17.2 billion in tax receipts were collected in the first seven months of the year. This is €247 million or 1.4% below target. NCBs expectation is that the full year miss will be of the order of €600mn despite the fact that the growth outlook is more favourable than was projected by the Department of Finance at the time of the Budget. The miss in our view stems from the fact that the nominal value of the economy at year end 2009 is some €4bn less than was initially estimated.

VAT, corporation tax and excise duties performed to expectations in the first seven months of the year. While income tax remains behind target at end-July.

Expenditure

Cumulatively voted expenditure was 2.6% less than anticipated for the period to July, driven entirely by then much smaller category of capital spending. Net voted capital expenditure at end-July, at €2.2 billion, is €660 million or 23% below target. A significant proportion of this shortfall is due to timing and operational issues and it is anticipated that capital expenditure will pick up in the latter part of the year. At end-July, net voted current expenditure was on target.

National debt services costs were €213mn less than had been anticipated in the profile.

Deficits and debt

The bottom line was that the Exchequer deficit at end-July 2010 was €10.2 billion. For the full year the Government is looking for an exchequer deficit €18.78bn. We believe that taxes will come in lower than anticipated, but this will be offset by some savings on interest costs and capital expenditure to leave the full year deficit not that much different to the Government’s forecast at €18.85bn.

The lower value of the economy mention earlier, will however, lower the denominator in the EU measure of the General Government Deficit (GGD) to GDP. The Government is looking for a 2010 figure of 11.6% versus NCB at 12.0%.

It has become common to refer to the difference between day-to-day revenue and expenditure discussed above as the “underlying deficit” as in reality the transfer of funds to Anglo and Nationwide will form part of the deficit. Thus the NCB forecast is that the actual final 2010 GGD to GDP ratio will be 20.2%.

The NCB forecast is that the debt to GDP ratio will reach 87.1% by year end 2010 before peaking at 101% in 2013.

Ulster Bank economists, Simon Barry and Lynsey Clemenger, commented:

Tax revenues continued to underperform in July, though at least income tax receipts were a bit better than expected

Tax revenues came in below the Department of Finance’s monthly plan for the third consecutive month in July. While the €19m shortfall is negligible and will in itself have no significant bearing on budget arithmetic, it is notable that tax receipts have been on the wrong side of the Department’s forecasts for five out of the six months in which the estimates have been available for. Indeed, the general trend for tax receipts to underperform so far in 2010 is at odds with the pattern evident in many other indicators of economic health, which have by-and-large come in ahead of the expectations of the Government and economic forecasters alike.

In terms of the detail, a €36m shortfall in VAT receipts was the primary source of tax revenue weakness in July. However, it should be noted that this is a much better performance than in May (the previous VAT collection month), when receipts were some €133m behind. But overall in the year to July VAT revenues are actually running €14m ahead of plan. While this is small in the overall scheme of things, it does at least back up the better signs on consumer spending so far in the year. Other tax categories including corporation tax and capital gains tax are also modestly ahead of plan in the year to July. However, the poor performance of income tax receipts is more than offsetting this. While July itself was a better month for income taxes (€14m ahead of plan), these are running some €290m behind on a cumulative basis, indicative of the continued weak state of the labour market.

€1.9bn expenditure reduction dominated by €1.2bn of cutbacks in capital spending

On the spending side of the ledger, the July numbers continue to show considerable expenditure restraint. Total net voted spending by government departments is running 7% below 2009 levels, a somewhat greater decline than the 6.2% fall reported last month. In cash terms, this amounts to a reduction in spending levels of over €1.9bn

As has been the case throughout much of the year to date, it is the capital budget which is bearing the brunt of the adjustment. This category accounts for over €1.2bn of the total decline, equivalent to a decline of 36% vs. the same period last year. Not only is capital spending running significantly below year-ago levels, but it continues to run well below planned levels for this stage of the year. The cumulative shortfall relative to the Department’s profile amounted to €660m in July, with some 70% of this due to lower than planned spending in the ‘Big 2’ capex departments, Transport and Environment. In percentage terms, the overall shortfall was 22.8% in July vs. 24.8% in June, hinting at some slight pick-up in spending relative to plan last month, though the extent of the underspend clearly remains considerable.

Day to day spending is right on plan running €695m, or 2.9%, below 2009 levels – a somewhat greater degree of spending restraint than the 1.9% fall of a month ago. But in truth, this masks a much stronger pull-back in underlying spending as if we strip out a 23% increase in spending at the Department of Social Protection (a function of higher social welfare payments), the remainder of current expenditure is down over 11% on year-ago levels.

Is the capital budget being used to guard against the risk of a shortfall in tax receipts?

Overall, seven months into the fiscal year it remains a source of some disappointment that tax revenues are continuing to run behind expectations. Even though the monthly outturn for July was only slightly behind plan, the fact is that tax receipts are 1.7% lower than where the Department of Finance had been expecting them to be for this stage of the year.

Even though the trend in the annual rates of change is clearly moving in the right direction (-8.2% in the year to July vs.19% for 2009 as a whole), it looks increasingly likely that receipts will fall short of the Minister’s Eur31 bn full-year target from Budget day. Indeed, there was a sign of some ebbing of confidence in that forecast as the Department’s accompanying Information Note acknowledged that while the Budget forecast “remains achievable”, there are “significant targets to be met in the months ahead” and that taxes will “continue to be closely monitored”.

That wasn’t the only interesting change of language in the monthly Note from the Department. Previous commentaries (including last month's Note) had, in the context of the considerable shortfall in capital spending, referred to the expectation that Departments would “adhere to their (spending) allocations for 2010”. This month, however, the note simply refers to an expected pick-up in capital spending in the latter part of the year with no explicit reference to adherence to previously published spending plans for this year. This is a subtle change but we wonder whether it is an indication that the sharp pull back in capital spending partly reflects the desire of the Department to ensure any deterioration in the underlying fiscal position (due to any shortfall in taxation) is met by a corresponding additional saving on the capital spending side. Time will tell on this one.