Economy weaker than expected in key areas of incomes and summer spending

ANALYSIS: The latest exchequer returns show that the fiscal mountain to be climbed is as big as ever, writes PAT McARDLE

ANALYSIS:The latest exchequer returns show that the fiscal mountain to be climbed is as big as ever, writes PAT McARDLE

MONTHLY EXCHEQUER returns are of interest from two perspectives. First, to see how the budget estimates are doing and the implications this might have for the tax burden, and, increasingly nowadays, the level of Government spending. Related to this is the light they throw on what is going on in the economy.

The last budget was in early April, and the department issued the monthly profile of receipts and expenditure later that month. As the outcome for the early part of the year is of limited use, we focus on the four months from June to September to analyse how things have been going.

Doing this, we find that there was a €1 billion shortfall, split roughly equally between income tax and value added tax (VAT); half of this fell into September and the other half was spread over June and July.

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Basically, this tells us that the economy was weaker than the department expected in two key areas, incomes and spending over the summer. This is not an exact science but it is probably fair to say that the tax returns did not support the “green shoots” argument in vogue at the time.

Then there are the implications for the budget itself. These crystallised in the October announcement by the Minister that there would be a €2 billion shortfall in tax revenue this year. Though he did not dwell on it, this makes the task of correcting the public finances over coming years even more difficult.

Against that background, the October data, released yesterday, are something of a relief. After the very poor performance in September, tax revenue was “only” €100 million below target in October.

So is the Minister gilding the lily when he talks of a €2 billion shortfall for the year as a whole?

With October gone we are €1.1 billion down, which means that the other €0.9 billion shortfall must now be squeezed into November and December.

Unfortunately, the October figures were not as good as they seem as the overall total concealed some big pluses and minuses. The most notable was a €150 million undershoot in income tax. Though this was offset by gains elsewhere, it does indicate continued weakness in a key area.

November is the biggest month for income tax given that the self-employed pay their annual dues in that month. Last year the November shortfall was a whopping €3 billion. It will not be anything like that this year but it could be upwards of a billion.

November is also a big month for corporation tax – almost a third of it falls due – and it will see the final two-monthly VAT receipt. The results of all this will be known on December 2nd, a week before the 2010 budget.

A year ago the budget was introduced in October and the November tax returns ran a coach and four through the arithmetic. The Government has been careful not to let that happen again. Come December, however, it will be lucky if the 2009 tax revenue shortfall is still within shouting distance of the Minister’s €2 billion estimate.

The fiscal mountain to be climbed is as big as ever and the latest taxation data at best point to a levelling off in economic activity.