ANALYSIS:Politically sensitive spending continues to rise at the expense of capital expenditure

PUBLIC SPENDING and revenue figures released yesterday were mixed. The second-largest quarterly deficit in the State’s fiscal history was recorded in the first three months of 2011 while tax revenue growth in the same period stayed in positive territory.

All things considered the numbers could have been worse. Moreover, they were good enough to ensure that the deficit target established under the EU-IMF bailout deal was met.

With the bailout troika getting down to business in Dublin today, it is not unhelpful that slippage on the deficit target has been avoided. This should make Frankfurt’s fiscal hawks less grumpy and increase the chances, if only marginally, of concessions on the terms of the package.

Although the exchequer deficit in the first quarter was the second biggest ever, at just over €7 billion, it was below the €7.8 billion figure set out in the bailout terms.

Two other quarterly metrics were set out in the bailout conditions – Government debt and a revenue measure. Curiously, the Department of Finance had no comment on whether these targets had been met.

Total exchequer revenue (tax and non tax) grew by 2.1 per cent on the first quarter of last year. Although slightly below official projections, this was the fourth consecutive quarter when total revenues were either expanding or stable compared to the year-earlier period. As the chart shows, the free-fall of the previous years is over.

About the worst news on taxes related to value added tax. While it was the largest source of revenue in the first quarter, raking in €3.1 billion, it was down more than 3 per cent on a year earlier. The fall reflects consumer inability and unwillingness to spend.

The second largest source of revenue was income tax (which includes the Universal Social Charge). The large rate hikes contained in budget 2011 resulted in a revenue increase of almost 10 per cent year-on-year in the first three months of the year.

That, however, was below official expectations. The mandarins had believed that such hefty rate hikes would generate an increase closer to 15 per cent. This adds to the body of evidence suggesting that taxing your way out of a big budget deficit is less effective than wielding a scalpel on spending.

More positively, excise duties – the third largest revenue source – were up by 10 per cent on the first quarter of 2010 – well above officials’ targets.

Where once taxes linked to the property market flooded into the exchequer, they now just trickle. Stamp duty and capital gains tax combined generated a mere €195 million in the first three months of the year. This was below the department’s already low expectations and represents a fall of more than one-fifth year-on-year.

Figures on the state of the property market, also released yesterday by daft.ie and myhome.ie explain this. By both organisations’ reckoning, property prices continue to slide in early 2011, with no let-up in the pace of decline.

On the expenditure side, the cost of taking on the losses of Anglo Irish Bank began kicking in when measured by the exchequer cash flow figures – they were fully accounted for last year in the EU compatible set of figures, which are produced with a long lag.

Most areas of current expenditure fell year-on-year. But the biggest spending departments recorded sizeable increases – Health and Children, Social and Family Affairs, and Education and Science.

Non-bank capital spending, at €594 million in the first quarter, was almost half the figure of the same period in 2010. By contrast, total current spending rose by 6.5 per cent. It is clear that infrastructure spending continues to fall while more politically sensitive current spending goes on growing.

By the by, one wonders if those involved in drawing up the recent Wright report on the Department of Finance’s performance during the boom ever looked at revenue patterns. The chart shows revenue growth started heading south in the first half of 2007. In the second quarter of that year, the largest deficit in eight years was recorded. Yet, in mid-2007 department officials were giving the same advice as a year earlier on how much taxes could be cut and spending increased.

Would the troika folk be in the department today if its officials had not been snoozing when the ship of State began veering off the fiscal straight and narrow?