Stability at last, but at a low level

ANALYSIS:A YEAR ago, in November 2008, the Government expected to take in €10.5 billion in taxes for the month but got only €7.5 billion – €3 billion, or almost 30 per cent, below target, writes PAT McARDLE

That news came about six weeks after the October 2008 budget and was when it became clear that we were in big fiscal trouble. The consequence was two effective mini-budgets in January and April.

Yesterday’s exchequer returns revealed a somewhat different picture. The revised and much-reduced estimate for tax revenue this November was €4.9 billion and the amount received was €4.7 billion, a shortfall of only 5.7 per cent.

Lest anyone get carried away, however, the task facing the Minister next Wednesday is not any easier; we only have to note that actual receipts in the 11 months to November were a whopping €8.1 billion down on a year earlier. This is equivalent to six wage deals of the type that is being negotiated so tortuously at the moment.

Income tax was the star performer in the November returns. It came in €50 million ahead of target, having slipped €671 million in the preceding five months.

We do not have a breakdown of this, but given that PAYE had been underperforming, it is reasonable to assume that self-employed Schedule D receipts came in at or perhaps above target. This is some comfort even if the target was much reduced.

On the negative side, corporation tax and VAT again underperformed, each by €136 million.

There is not much one can say about corporation tax given that the bulk of it is paid by a small number of companies and no breakdown is given but it is likely that refunds are being claimed.

November is the last big VAT month of the year. VAT has been consistently weak and looks like being down about €800 million by end of year. This would make it the biggest underperformer, followed by income tax, which might be down about €700 million in 2009 as a whole.

Either the Department of Finance got the relationships between income, spending and the taxes they produce totally wrong or the economy has turned out to be weaker than expected last April. I am inclined to go for the latter explanation.

Finally, there is the question of the implications for the outcome for the year as a whole. The recent Pre-Budget Outlook forecast that taxes would undershoot by €2.2 billion in 2009 as compared with the April budget estimate. This now looks unduly pessimistic.

With 11 months gone, actual receipts are €1.4 billion behind the April budget target. To date, the worst-performing month was September when the shortfall was €539 million. A poor December could see another €500 million shortfall but this would still leave the overall deficit for the year below €2 billion. It is more likely to be around €1.75 billion.

There is little to remark upon on the other side of the account, other than that both current and capital spending look like coming in a few hundred million below target. The end-November returns point to a bigger undershoot, especially in capital spending, but the word at the last press conference was that much of this would disappear before year-end.

The Minister can take some comfort from the fact that the economy, and with it the tax situation, has stabilised, albeit at a low level. It is now clear that the borrowing requirement will be just over €25 billion and the more important general government deficit about €19.25 billion or 11.6 per cent of GDP.