Data will offer some comfort to Government

ANALYSIS:Slower Live Register growth will alleviate the upward pressure on public spending

THE GOVERNMENT will take some comfort from yesterday’s two pieces of news relating to the economy: the exchequer statement for August; and the Live Register for the same month.

The number of people on the Live Register increased by 5,400 seasonally adjusted in August.

This is not a trivial number – it annualises at about 65,000 or about 3 per cent of the labour force – and is not exactly a cause for celebration. However, it represents the smallest monthly rise since April 2008 and marks the continuation of the steeply decelerating trend in place since the start of the year. Recall that in the January to March period the average monthly increase was more than 25,000.

Moreover, the last few months’ Live Register data suggests that unemployment may peak sooner and at a lower rate than most analysts have been forecasting.

The rate is estimated at 12.4 per cent for August and is now on track to finish the year in the 13 to 13.5 per cent range, implying an average of under 12 per cent for the year. The most recent forecasts from the likes of the Central Bank and Economic and Social Research Institute have been anticipating an average of 12.6 to 12.8 per cent for 2009, and an average rate for next year of 15 to 16 per cent. This kind of trajectory is, happily, beginning to look improbable.

To what may we attribute the unexpectedly sharp slowdown in the Live Register’s upward climb?

Part of the answer is a slower rate of job loss. The number of redundancies reported to the Department of Enterprise, Trade and Employment in August was the smallest since last December, though still worryingly large (at almost 6,000) and almost three times the monthly average of the 2002 to 2007 period.

But the trend in redundancies is only part of the answer. Migration trends seem to be exerting some influence too. In the months prior to March, non-Irish nationals routinely made up 25 to 30 per cent of the increase in the Live Register; in the April to July period, that proportion was just 8 per cent. In July the number of non-Irish nationals on the register actually fell, even as the overall figure rose by 17,000.

Indeed, the number of non-Irish nationals from the so-called EU accession states on the Live Register fell in May, June and July. The declines are small, but there has been a clear change in trend, which one would expect to be confirmed tomorrow by the more detailed August Live Register data.

Slower growth in the Live Register will alleviate the upward pressure on public spending. It is worth noting that the detailed data on expenditure released with the exchequer statement indicates that current spending by the Department of Social and Family Affairs was running below official expectations at the end of August.

Total current spending was in line with expectations, while capital spending was 8 per cent behind plan.

On the other side of the ledger, tax receipts are still under- performing: at the end of August they were €425 million below the official estimate of where they should have been at that stage if the end-of-year €34.4 billion target is to be achieved. The sliver of good news here is that the gap between projection and out-turn narrowed in the month: at the end of July, it was €575 million.

I stick to my long-held view that tax revenue will finish the year a billion or two shy of the target set in the April supplementary budget. In assessing the prospects here, one must separate out corporation tax (CT), because the time profile of receipts has been altered by the new payments schedule introduced this year.

My calculations suggest that, to reach the official target for taxes (excluding CT), receipts over the September to December period will need to be no more than 3 per cent lower than in the corresponding period of last year.

The problem is that, over the January to August period, such receipts were down 20 per cent on last year. An improvement of that magnitude is simply not going to occur. This points to a non-CT shortfall of up to €2 billion.

This may be partially offset by greater-than-expected buoyancy in CT receipts. Who knows? The behaviour of CT receipts is a mystery to all but a small and select confederacy.

It is worth noting what recent tumultuous events have done to the composition of tax revenue.

In the year to date, capital taxes and stamp duty have accounted for less than 4 per cent of total tax receipts, compared with 16 per cent in 2006. By contrast, the share of income tax in the total, which was just 27 per cent in 2006, has since risen to 35 per cent, its highest share in more than a decade. This is one set of numbers that should inform public debate on the Commission on Taxation report.

jim.oleary@nuim.ie