Too early to say if positive tax receipts signal a change of direction
There are positive signs but many variables mean that caution is required
When the troika was in town, the Government’s strategy was to under-promise and over-deliver. It allowed the Department of Finance hit its headline budgetary targets with something to spare, even if key metrics, such as income tax and VAT, remained in the doldrums.
In the post-bailout world, however, the focus may be shifting back to what’s happening in the real economy.
The exchequer returns for March provide the first clear insight into the health of the State’s finances since the end of last year.
This is because figures for the first two months of the year were distorted by the introduction of the euro-wide Sepa payments system.
At face value, yesterday’s numbers were positive.
Tax revenues in for the first quarter were €9.2 billion, representing an increase of €415 million or 4.7 per cent on the same period last year.
Significantly, tax as a whole was €257 million or 2.9 per cent ahead of profile.
The big question,however, is whether this reflects the marked upsurge in employment last year, and the first inklings of a concerted rise in consumer spending and consumer confidence.
Minister for Finance Michael Noonan has said all along that the clearest signal of what is happening in the economy is the growth in employment.
Up until now, however, this growth has not been showing up – in any meaningful way – in income tax or in domestic demand. The view taken by some is that the new jobs are not in high-paying sectors of the economy.
There is also the fact that disposable income on average remains on a downward slide, not helped by the introduction of a property tax.
Nonetheless, yesterday’s figures indicated income tax receipts were up €129 million, or 3.5 per cent, and were €4 million ahead of the Department of Finance’s expectations.
The main consumption-related taxes, VAT and excise duty, were up 6.4 per cent and 11. 5 per cent respectively.
An eye-catching drop in corporation tax receipts, which came in at €256 million – 35 per cent down on last year – was explained by a once-off tax payment by an unnamed pharmaceutical company made late last year, which had not been factored into the department’s initial projections.
All of this reads positive, perhaps too positive, with so much of the year still to run.
Reading a pattern into the convalescing Irish economy is fraught with difficulty, not least because several factors that will determine the economy’s future trajectory – and indeed the Government’s potential tax receipts – are outside of its control.
Take the situation in the Ukraine. If things worsen, consumers could be facing higher oil and gas prices, which could have an extremely negative effect on consumer spending.
Data for industrial output, exports and hence GDP are being driven by an exceptional fall-off in the profitability of the pharmaceutical sector associated with the so-called patent cliff. This will, in time, be worked through but the overall impact on the economy is difficult to gauge.
The Government’s prediction for GDP growth at the end of last year, which had factored in the patent cliff, was way off.
Then there is the pick-up in euro zone growth, a key requirement for economic recovery here. This is going is the right direction but only just.
All of this means it’s simply too early to state, with any certainty, where the domestic economy is headed.