Department warns on taxes as spending pressures emerge

Taxes will have to meet targets in the key months of November and December if the Government is to have funds to pay for additional spending commitments, the Department of Finance has said.

The exchequer deficit in the first 10 months of the year was almost 11 per cent ahead of the same period last year. Tax revenues remain strong and should hit their target levels for the year, the department said, but will have to do so to fund increased spending levels agreed by the Government in recent months. November and December are key months for income tax and VAT receipts and the trends will have a major impact on the annual outturn.

Government spending is now expected to hit €56.1 billion this year, which is €850 million higher than allowed for at the start of the year. This is because the Government agreed to provide an extra €500 million for health, and €40 million for the Department of Justice in July. It then announced that a further €310 million would be spent to fund a Christmas bonus for long-term social welfare recipients and for increased capital spending on schools and flood controls.

Banking investments

Rising spending is the main reason the deficit is now running ahead of 2016 levels, while there was also a fall-off in non-tax revenue and a decline in receipts from sell-offs of banking investments.

Financial analysts agree with the department’s assessment that this will require taxes to remain strong in the last two months. Goodbody Stockbrokers’ Dermot O’Leary said that tax would have to grow 8 per cent year on year in the last two months to reach target, but that below-target spending could also help the Government meet its overall deficit target.

Tax revenues were solid in October, coming in slightly ahead of target after some weakness in the three previous months. Tax receipts are now running €613 million ahead of target in the first 10 months of the year. Taxes had missed their monthly target in each of the previous three months but in October they ended €129 million, or 4.1 per cent , ahead of expectations.

Income tax receipts in October closed the month 1.3 per cent above target and are now just marginally below target for the first 10 months and 4.2 per cent up on the same period last year. Strong employment growth would have suggested a better performance from income taxes, which may have been affected by slow wage growth.