Exchequer returns show slowing of revenue growth

In 2002 the buoyancy of the Exchequer returns was one of the factors that helped return the Government with a handsome majority…

In 2002 the buoyancy of the Exchequer returns was one of the factors that helped return the Government with a handsome majority. The message from yesterday's Exchequer figures is that this buoyancy has now disappeared.

If the term revenue buoyancy has any significant meaning now, it is to refer to those happy times when revenues exceed expectations. Last year, for example, the Government expected total revenues to grow by 6 per cent. They grew by 16 per cent. It actually expected stamp duty revenues to fall in 2006. They grew by 36.4 per cent.

Back in December, the Government did its forecasts for this year's monthly revenue receipts. When the actual returns came out for January and February, they showed that there was still some buoyancy left in the system.

Cumulative revenue growth for those months, 12.2 and 12.8 per cent respectively, were running modestly ahead of monthly profiles. However the extent of the overshoot was much more modest than experienced for last year as a whole.

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As we now know from yesterday's figures, total tax revenues grew in the first three months of the year by 10.2 per cent, practically identical to the 10 per cent profiled for the period last December.

The big question now relates to whether this deceleration will continue. If it does, years of revenue overshoot may suddenly start turning into undershoot.

The risk that this could happen is evident from that most talked about category of taxation: stamp duty. Last year revenue growth overshot expectations by a whopping 37.4 per cent. In the year to March 2007, the extent of that undershoot has fallen drastically.

Compared to expected growth of 11 per cent, stamp duties have grown by 12.8 per cent, but this should be no comfort whatsoever to the Government, far from it.

The Department of Finance, which prepares the revenue forecasts, is well known for its conservatism and prudence and its forecast for this category understated what most people regarded as reasonable.

What will be more worrying for the Government is the sheer pace of declaration in revenue growth that these figures imply. When growth in any revenue slows from 36.4 per cent to 12.8 per cent, the story is unlikely to end there.

With house prices continuing to fall modestly and activity in the housing market slowing significantly, stamp duty receipts probably have further to fall, given the stratospheric heights it reached last year.

If that happens, there will be no consolation from other sources of revenue. VAT receipts and income taxes are modestly lower than expected in the first quarter.

Capital gains tax revenues are substantially lower, while capital acquisition tax, excise duties and customs receipts are also lower.

In fact whereas only three tax categories were undershooting expectations in January - customs duties, capital acquisition taxes and income taxes - all but two categories, stamp duty (for the time being) and (corporation taxes) are now undershooting.

If stamp duty receipts continue to slow rapidly, any remaining buoyancy in corporation taxes will not be enough to prevent total taxes from falling below forecasts. If that happens before election day, expect to hear a lot about it.