Strong tax take raises possibility of neutral budget

Analysis: political case is understandable but pitfalls remain

A neutral budget would likely put Minister for Finance Michael Noonan on  a collision course with Brussels. Photograph: Gareth Chaney/Collins

A neutral budget would likely put Minister for Finance Michael Noonan on a collision course with Brussels. Photograph: Gareth Chaney/Collins

 

Could the Government get away with making no adjustment in the next budget? On the basis of yesterday’s exchequer returns, this is now a possibility. Whether they should or not is a different matter.

The key number to focus on is the exchequer balance – the amount of money the Government has over and above its projections.

Better-than-expected tax receipts (income tax, VAT, excise) coupled with lower interest repayments on the national debt are offsetting overruns in health to the tune of €798 million. If this trend continues, the Government will be in the region of €1 billion better off come budget time.

Add to this the positive growth momentum in the economy and one can see how Minister for Finance Michael Noonan might make the case for a neutral budget.

Collision course

This is likely to put him a collision course with Brussels, which will say he is counting his chickens before they’ve hatched, and that the Government should stick the €2 billion adjustment originally targeted.

All of which is part and parcel of the pre-budget choreography in post-crash Europe.

However, it’s worth noting that the budget adjustment number – once a figure barely remarked on – has now become the focus of political survival for the Government.

Presuming it serves a full term, it has two just budgets left to endear itself to the electorate, who are desperate to shed the yoke of austerity.

By the end of this year, nearly €32 billion in spending cuts and tax increases will have been taken out of the economy since 2008 – equal to 20 per cent of GDP – which makes Ireland’s austerity project nothing if not brutal.

If the improved headline economic numbers do not start translating into more money in pockets, the Coalition, or at least Labour’s end of it, fears it will perish at the next election.

The two positives in yesterday’s exchequer figures are obvious. Improved labour market conditions – more people at work – is translating into better-than-expected income tax receipts – €9.2 billion for the seven months to July 31st, 7.6 per cent up on last year.

VAT and excise duty, which came in at €7.1 billion and €2.8 billion respectively, both performed strongly and were ahead of last year and this year’s targets.

Is this the long-awaited recovery in consumer spending?

The figures would suggest spending on “big ticket” items such as cars and household goods is picking up. The increase in the number of people exiting negative equity – as evidenced by a report last week – may also be having a positive impact on the high street.

Interestingly, excise duty may eclipse VAT receipts next month on the basis of bumper car sales tied to the new six- month registration system.

There is still, however, a €243 million overhang in health that will have to dealt with. And all this positive data, has to be packaged with its own strong health warning.

The Cabinet will have to formulate its budgetary adjustment in advance of the last two months of the year, when an estimated 30 per cent of the Government’s tax take arrives.

Last year, an expected acceleration in economic growth in the last quarter failed to materialise due to a greater-than- expected contraction in the pharma sector.

While growth in Britain is undeniably strong, recovery in the euro zone is far from assured and may yet exert downward pressure on GDP here.

Consumers could also be facing higher oil and gas prices if the situation in the Ukraine worsens.

The problem with basing everything on economic forecasts is that they’re more often wrong than right. That said, the Government can only work with what it has got.