Cliff Taylor: Latest tax figures point to limited budget wriggle room

Income tax is still behind and it is a mystery given the strong employment growth

For the year to date income tax remains just over €200m   behind target. Photograph: iStock

For the year to date income tax remains just over €200m behind target. Photograph: iStock

 

The tax figures did not get any worse in May, which will prove something of a relief to those taking office when a new government is formed. If the poor trend in the early months of the year had continued, it would have presented the new Ministers with some difficult choices.

Now there are some signs of improvement, although it is still too early to sound the all-clear. And there is certainly nothing yet to suggest that the customary overshooting of tax targets we have got used to is set to be repeated this year. It all suggests that the room for spending increases and tax cuts in the budget will be limited.

The tax figures for May came in 1.5 per cent ahead of target, which is encouraging given that it is the second most important month of the year for tax collection, with significant corporate returns and VAT due. The strong returns meant that the overall shortfall for the year, compared to target, is now just 1.4 per cent, or €268 million in cash terms. If the trends seen in May continue, then the targets for the year could be met.

The strong performance last month was based on income tax coming in roughly on target, while corporation tax and a number of smaller taxes such as excise duties, local property tax and stamp duty all came in a bit ahead. VAT returns were on target and this area has been the star performer of the year, rising 13 per cent on 2016 and running almost 4 per cent ahead of expectations.

Surprise weak spot

While rising VAT reflects increased consumer spending, the surprise weak spot of 2017 has been income tax, which is something of a mystery given strong employment growth.

For the year to date it remains 2.6 per cent, or just over €200 million, behind target. If the tax trends are going to really come right for the Government then we will need to see income tax back running ahead of target for the rest of the year and particularly when the autumn self-employed tax returns come in.

There won’t be a huge amount of spare money to spend in the budget. The Department of Finance has said that when existing spending pledges are met, it could be as low as €500 million. However, the first formal forecast of the pre-budget sums will come in the summer statement, which will also outline where the Government sees as its priorities for the package.

With the public pay talks also now in the mix, the new Taoiseach faces the tricky job of meeting significant expectations with relatively little fresh cash. Budget 2018 will, no doubt, attract the usual hoopla, but unless the Government is willing to cut spending or raise new taxes elsewhere to provide cash for new measures, it could be a relatively tame affair.

The big economic jobs for the new Taoiseach will be leading a response to Brexit and trying to find a way to progress some of the key economic problems, including the infrastructure deficit. Given the limited additional cash to spend, this is going to involve tough calls on what the priorities are – and how to pay for them.

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