Irish Economy 2014:  Department of Finance data on Wednesday showed an Exchequer deficit at end of June at €4,94bn, an improvement of €1.65bn compared to the first half of 2013. Both total tax revenue of €18,47bn and the net voted expenditure outturn are slightly better than targets in Budget 2014. While tax revenues are about €500m ahead of target, the fall in the Live Register by 36,500 in the year to June has only had a  €20m impact on the Social Protection budget.

Conall Mac Coille, chief economist at Davy, commented - - "Exchequer returns for June show the tax and spending arithmetic still looking better than expected heading into next year’s Budget.

Tax revenues continue to show strong growth and are approximately €500m ahead of target in the first half of 2014. Less favourably, current expenditure has overrun for the first time this year, led by problems in the Department of Health. That said, capital expenditure was €105m under budget.

The government finances are also benefitting to the tune of €222m in extra income from the Central Bank. Overall, the government deficit looks set to beat the 4.8% of GDP target set for 2014 to end close to our forecast for a 4.4% deficit this year. Overall, the exchequer balance is already around €1bn better than expected in H1 2014, approximately 0.6% of GDP – a fact that will be surely be seized upon as political cover to reduce this year Budget adjustment to around €1bn, below the €2bn originally planned. At face value, the revenue figures show deterioration in aggregate.

Income taxes (+€64m), value added tax (+€113m) and excise duties (+149m) are all showing strong growth and are ahead of target on the year. However, the Department of Finance has indicated that timing effects related to the Single European Payments Area (SEPA) delayed the collection of €250m of corporation tax receipts expected in June, but paid in early July. Once this timing effect is accounted for, tax revenues are about 2%, or €500m, ahead of target.

The underlying picture is that tax revenue growth remains robust and continues to beat expectations, suggesting buoyancy in the domestic economy. However, developments on the expenditure side are less favourable. In previous years a pattern has developed whereby tight expenditure discipline in most departments has compensated for persistent overspending in the Department of Health.

In H1 2014, health spending is already €200m, or 3%, over budget. Tighter controls on expenditure in Education and other departments have not been sufficient to offset the overrun in Health. Aggregate current spending is now over budget, albeit by only €10m. Moreover, spending in the Department of Social Protection is only marginally below expectations, by -0.2%, or €20m. It is surprising that greater savings on social spending have not been made. Live Register data (July 2nd) show the unemployment rate falling to 11.6% in June, far earlier than expected in Budget 2014. The Budget 2014 forecasts envisaged unemployment falling to 11.8% in 2015 and to 11.4% in 2016."

Peter Vale, tax partner at Grant Thornton commented: "This is yet another impressive set of figures, with tax receipts ahead of target and spending largely under control. The consistently positive news on the jobs front is translating into strong income tax receipts, 7.4% ahead of last year’s figures, although there was a slight weakening in the figures for June. We also know that people are spending more, reflected in strong VAT receipts, 7.3% ahead of last year.

There’s very little negative news in the figures although surprisingly corporation tax receipts were significantly below target. However once again the difficulties with SEPA have been identified as the reason and the shortfall is likely to be made up in the next couple of days. A real deficit would be a significant concern as the June payment is often a first instalment based on full year profit projections so lower than expected corporation tax receipts would reflect more negative profit estimates. Hopefully the Department’s predictions are correct and matters such as the patent cliff are not to blame.

As we are right in the middle of pre budget submission season, the Minister is receiving advice from all quarters as to the level of adjustment required in October. While some form of increased taxation is likely to be required next year, it also looks like taxpayers will be granted relief by way of increased credits or a widening of the tax bands. At this stage, a cut in income tax rates looks very unlikely, with a rate cut for 2016 probably the best we can expect.

International tax developments continue to be critical for Ireland given the importance of overseas investment to our economy. It’s quite possible that we’ll see some significant changes to the Irish tax regime in the October budget, although maintaining a competitive tax offering will continue to be a priority. Overall, the new global tax environment is likely to play into the hands of Ireland as it will put a much greater emphasis on real substance, something that should encourage multinationals to continue to look to Ireland for expansion."

Currently a firm may gain from either having substance or not -- why would firms relocate to Ireland if they have already chosen other locations for whatever reason?

US tax inversions screw-up Ireland's national accounts; Bring few benefits