Latest figures serve to calm pre-budget giddiness

After a stellar tax yield in August and three growth upgrades in as many weeks, exchequer returns for September serve to calm any sense of over-excitement. Tax receipts remain well ahead of target overall, but any expectation of a further significant boost before Budget 2015 in a fortnight came to nought.

On the contrary, indeed. The Government returned to work after summer with taxes running close to €1 billion ahead of forecasts. These new figures show that the surplus over target had narrowed to €703 million by the end of September, although a further €220 million is awaited from the special levy on pension funds. The net surplus, therefore, remains somewhere north of €900 million.

The September returns are crucial, as they form the basis on which Minister for Finance Michael Noonan will finalise the financial plan for 2015. Any significant revenue uplift over the official target would have intensified political pressure for a giveaway package on October 14th.That did not happen. But after long years of relentless retrenchment, the starting point for Budget 2015 is still a positive one.

“The economy is growing, more people are at work, and consumer confidence is rising, and this is reflected in today’s exchequer figures,” Noonan said in a statement.

The Government has tried for months to damp down the clamour for an appreciable recovery dividend through an income tax cut. A modest concession is still likely, as is a medium-term plan to deliver bigger reductions over the course of the next four years. Still, the introduction of the water charge this week means that any income tax reprieve would be offset by the new fee for water.

The question of whether the immediate focus of any reduction should be on the universal social charge (USC) or on the higher income tax rate of 41 per cent remains unsettled. Tánaiste Joan Burton is fixed on the USC. At the very top of Fine Gael, they are keen to tackle the 41 per cent, but some Ministers in the party would be happy enough to get going first on the USC.

Small reduction

The bottom line remains that only a small reduction is in prospect, and that would still be expensive. Any anticipation of something more than that may well be tempered by the fact that income tax and corporate tax receipts last month came in below forecast. Income tax was 3 per cent off target, nothing particularly dramatic, but corporate tax was 19 per cent below forecast. Still, such receipts tend to fluctuate.

More positive was the fact that VAT and excise receipts, which reflect spending in the real economy, came in ahead of target last month. This points to an improvement in consumer confidence as recovery takes hold. “The increases in VAT and excise duties, which are both up 6.5 per cent respectively on the same period last year, are particularly encouraging,” Noonan said.

With caution the watchword at the Department of Finance when it comes to the Budget, the fact that returns in other tax brackets did not march ahead last month may well play into Mr Noonan’s hands. The same goes for Brendan Howlin, Minister for Public Expenditure, who is still trying to curtail spending demands from Ministers .

The economy is flying at a higher altitude than anticipated, yet these figures show that the tax yield can be volatile enough.

Very little leeway

These figures also demonstrate that there truly is very little leeway. The exchequer deficit declined in the first three quarters of the year by €1.2 billion, but it still came in at €6 billion. As growth picks up, however, the Government remains confident that a budget deficit below 3 per cent can be achieved without recourse to further spending cutbacks or a net tax increase.

Still, health spending overruns show that pressure persists on the expenditure side of the equation. As Budget preparations enter the final strait, similar pressures are at work in the departments of education and justice .

The Government will not capitulate to demands for a €2 billion retrenchment from the Fiscal Advisory Council and the European Commission. Both council and commission would prefer a further demonstration of good cause, but the Government believes it has already done enough to bring in a neutral budget. This means there will be no net spending cutbacks, and no net taxation increase either.