Exchequer's new year begins as old one ended

Receipts must improve if budget targets are to be met – but this could be a year of two halves, writes PAT McARDLE

THE JANUARY exchequer returns are always difficult to analyse. You only have one month’s figures, both taxes and spending can be lumpy, and frequently the budget will have implemented changes that make comparisons difficult.

In recent years, the Department of Finance has been producing a handy monthly profile of tax revenue and spending so one can immediately see whether the official expectation has been over- or undershot.

The profile is usually issued along with the January numbers and is invariably identical to the outcome so one is never sure whether the budget target has been achieved or not in the first month of the year.

At first glance, the overall picture this time is not too bad. Large reductions in tax revenue were offset by falls in spending leaving the exchequer deficit for January broadly unchanged from a year ago (see table).

Current and capital spending were down 11.9 and 21.1 per cent, respectively, on January 2009 as compared with the -0.2 and -6.7 per cent budget-day targets for the year as a whole.

These are big reductions but there is good reason for them. Policy cuts in spending did not really get under way until after January 2009 so the latest month reflects the cumulative of all the various measures that have been implemented including the public sector pensions levy, which shows up in the data as a reduction in spending rather than a receipt.

January would also have been affected by the pay and social welfare cuts which took effect on the first of the month.

In the absence of a profile or target, all one can say is that the various spending cuts appear to be effective and the fact that the percentage reductions in January were way above those in the budget should not come as a major surprise.

Broadly similar reservations apply to the tax numbers. Total taxes were down 17.7 per cent but the comparison is flattered by the income tax levy which boosted this year’s receipts but was not operational a year ago. Allowing for this, taxes in January were down roughly 20 per cent, ie a slight acceleration on the 19 per cent fall in the final quarter of 2009. The budget target for the year is a much lower 6 per cent fall.

So tax receipts are at least as weak as they were late last year and need to improve smartly if the budget target is to be achieved.

Corporation tax, down 67 per cent, and stamp duties, down 41 per cent, are the headline grabbers but these are really sideshows. Along with capital gains tax, their yields were sufficiently low in absolute terms as to sideline them.

Value Added Tax is more interesting. VAT on transactions in November and December is collected in January. It was down 17.9 per cent, not affected by the reduction in the rate which took effect from January 1st, and broadly similar to the 17.2 per cent fall in the final three months of 2009.

This would indicate that spending remained flattish in the period up to Christmas. Neither was it affected by the weather which only really deteriorated in the new year.

Income tax, too, remained weak. When the distorting effects of the levy and other adjustments are allowed for, it appears to have continued to decline at an underlying rate in the high teens.

For the exchequer, the new year started as the old one ended. If the January tax pattern were to continue throughout the year, we would be in big trouble but this is not expected.

The budget assumes this will be a year of two halves. This should be reflected in a gradual improvement in the monthly tax figures in line with the profile issued by the department. It is all to play for.