Michael Noonan, Irish finance minister

Irish Economy: The Exchequer deficit of €5.2bn in the seven months to July represents an improvement of €798m on the Budget 2014 target, driven by increased tax receipts and reduced interest payments on the national debt, according to data published Tuesday by the Department of Finance (DoF).

The deficit was €5.15bn in 2013 but when one-off transactions (the sale of Irish life and the sale of Bank of Ireland CoCos) are excluded, the deficit of €5.2bn in 2014 has improved by €2.3bn when compared to the same period last year. This is driven by increased tax revenues and lower expenditure.

The DoF said total tax revenue of €22.38bn was collected to end-July, an increase of €1.35bn (6.4%) on the same period last year. In addition, cumulative tax revenues are €548m (2.5%) ahead of target. With regards to the month of July, tax revenues were €327m (9.1%) above the monthly target although this was flattered by delayed corporation receipts.

Income tax totalled €9.25bn to end-July, an increase of €654m (7.6%) year-on-year and up €54m (0.6%) on target, "which is reflective of the improving labour market as evidenced by recent Quarterly National Household Survey and live register data."

VAT receipts for the year to date totalled €7.11bn, up €242m (3.5%) on target and up €477m (7.2%) in year-on-year terms; corporation tax receipts for the year to date of €2.12bn are down €21m (1.0%) year-on-year but €69m (3.4%) above target. Corporation tax receipts for the month are €252m (221.4%) above target due to receipts delayed from June as a result of the SEPA payments system.

Overall spending (current + capital) to end-July 2014, at €24.17bn, is down €172m (0.7%) year-on-year and €73m (0.3%) below target

Health spending is up €273m (3.9%) over target and has been offset by underspends in most other Departments, particularly the Department of Social Protection where spending is €121m (1.7%) lower than target.

The DoF said that total Exchequer debt serving costs at end-July 2014 were €5.12bn a year-on-year decrease of €45m or 0.9%. This reduction largely reflects timing factors. Interest expenditure - - the largest component of debt servicing - - was 6.3% below the Budget 2014 consistent target at end-July 2014. This is primarily due to the December 2013 bond-buy back which resulted in lower interest expenditure in the early part of 2014, lower than expected costs from bond issuance so far this year and a favourable rate reset on the floating rate bonds post-Budget last December.

End July Exchequer Statement

End July Tax Receipts

End July Net Voted Expenditure

End July Gross Voted Expenditure

Michael Noonan, finance minister, said: “The Exchequer returns for the first seven months of 2014 show a strong performance in terms of both tax and expenditure. Cumulative tax receipts are up €1.3bn compared to the same period in 2013. This is further evidence that the recovery is taking hold across the economy.

If this pattern continues in the second half of the year the Budget adjustment will be somewhat less than the €2bn originally planned.”

David McNamara, economist at Davy, commented: "Tax revenues 2.5% ahead of target; spending discipline maintained: Exchequer returns for July show both tax and spending better than expected at the beginning of the year. Tax revenues were €548m (+2.5%) ahead of target in the year to July compared to a €500m outperformance in June. On the expenditure side, gross voted current expenditure was €66m (+0.2%) above expected levels, but was again offset by a saving of €89m in gross voted capital expenditure. The budgetary arithmetic has also benefited from better-than-expected non-tax revenues this year, particularly the €222m extra income from the Central Bank. In addition, lower debt interest payments have boosted the exchequer numbers. Overall, the government looks set to easily beat the 4.8% deficit target for this year, helped also by the recent upward revisions to the national accounts (for further detail, see the latest issue of Davy Economic Monthly, ‘Ireland heading for smaller Budget adjustment in 2015’, issued July 31st).

On the revenue side, all the main tax headings were ahead of target. Income taxes (+€54m), VAT (+€242m) and excise duties (+€132m) are all showing strong growth and are ahead of target. Corporation tax is now €69m ahead of target compared to a €183m undershoot in June, with delayed June tax receipts flowing into the exchequer during July.

Nevertheless, spending pressures remain. Health spending was €243m above expectations in July, while Social Protection spending came in €4m above expectations, despite the better-than-expected improvement in the labour market this year. Gross voted capital spending, however, was €89m below target, offsetting some of the overrun on the current spending side.

However, the key point on spending is that savings are largely coming from lower debt interest – now €301m (-6.3%) below expectations at the start of the year. So, savings on debt interest and stronger tax revenues should more than offset departmental overruns by year-end."

Peter Vale, tax partner at Grant Thornton, commented: "The latest set of positive tax figures will give further support to those advocating little or no adjustment in October’s budget. In particular, ongoing positive VAT numbers indicate that people are continuing to spend, reflecting much of the positive data we have seen in recent weeks and months. It’s reasonable to expect that people moving out of negative equity has helped increase consumer confidence.

Taxpayers are likely to see some respite in their annual tax bills in the budget, possibly through an increase in tax credits or a widening of the tax bands. While any such adjustment will still leave tax payers considerably worse off versus their position in 2007, a decrease in their monthly tax bill in the region of €50 per month could be expected. In the background, the debate around the future international tax landscape rumbles on. This is hugely significant for Ireland and we can expect a statement on our future tax strategy in October. This may be a commitment to continue our participation in the various global talks but could also potentially see a more radical adjustment to our corporate tax residence rules."