Positive tax receipts will add to pressure to ease austerity

The latest exchequer returns from the Department of Finance feed into what will be a key aspect of the economics and politics of the country over the coming year and beyond.

The figures show that taxes are approximately €500 million ahead of Government projections for the first six months of the year. It is not the case that the figure can be extrapolated out over the rest of the year, and a bonus of €1 billion presumed for 2013 as a whole, but it is nevertheless very possible that decisions around next year’s budget could be framed in such a context.

It is by now well-documented that the improving situation could see the Government achieve its 2015 target of a deficit of less than 3 per cent of gross domestic product, without targeting adjustments of €2 billion as had been earlier envisaged.

Targets exceeded

This type of view was evident in the reaction to yesterday’s figures. The Government deficit looks set to beat the 4.8 per cent of GDP target set for 2014 and is more likely to end up at 4.4 per cent, said Conall Mac Coille of Davy.

“Overall, the exchequer balance is already around €1 billion better than expected in [the first half of] 2014, approximately 0.6 per cent of GDP – a fact that will be surely be seized upon as political cover to reduce this year’s budget adjustment to around €1 billion, below the €2 billion originally planned.”

In their comments on the returns, Minister for Finance, Michael Noonan and Minister for Public Expenditure and Reform Brendan Howlin made no mention of the €2 billion figure.

The returns represented “a solid performance” in terms of both tax and expenditure. “With the gap between the income and expenditure of the State running at just under €5 billion for the first half of this year, this Government is committed to narrowing this gap, reducing our borrowing and meeting the deficit target of under 3 per cent by 2015.”

The Fiscal Advisory Council, designed to act as a counter to political pressures on the Government to adopt unwise economic policies, believes the €2 billion adjustment figure should be honoured.

On one view, this appears an odd stance, as the €2 billion number is a product of what it was once envisaged would be needed in 2015, to meet the percentage target. However, it is also a target that was set out some time ago, to follow 2013’s €3.1 billion adjustment.

Lesser figure

If a lesser figure is adopted and unexpected difficulties mean that Ireland fails to hit the 3 per cent target, the decision not to go for €2 billion in adjustments could lead to EU sanctions.

The Republic has gained from setting targets and meeting them, and a step back from the €2 billion figure in the first post-troika budget, which is also the first budget after the 2014 elections, where the Government parties got a trouncing, might damage the credibility that has been so hard won. Others will argue that with employment growing, and unemployment falling, an easing of the weight of budget adjustments on the economy is just what is needed to spur such positive developments along. It is also obvious that the public is weary after a succession of hard budgets.

There are good arguments on both sides as to what is the best way to swing. A key – but difficult to assess – measure will be the extent to which the Government lets its deliberations be influenced by electoral pressures.

We’ve been down that road before.