Falling tax revenues may force deficit above €11.5bn

PUBLIC FINANCES deteriorated further in October, with the exchequer deficit sliding to €11 billion for the year to date and spending cutbacks starting to kick in, the latest figures from the Department of Finance show.

As the economy sinks further into recession, tax revenues collected by the Government for the first 10 months of 2008 are almost 12 per cent behind projections made at the start of the year.

The Government spending cutbacks that were announced in July in a bid to shore up the exchequer deficit have also begun to show up in the returns data for the first time.

Spending came in €616 million behind projections in October, although social welfare spending is running ahead of target by a net €220 million, mainly as a result of a higher-than-expected number of unemployment claimants on the Live Register. The exchequer returns data for October shows that the Government has received total tax receipts of €31.4 billion compared to the €35.7 billion that it had been expecting.

Economists warned that the Department of Finance's current estimate of a €6.5 billion shortfall on tax revenue for the year may prove too optimistic and would make it difficult for the Government to meet its recently revised exchequer deficit of €11.5 billion for all of 2008.

With the economy likely to get worse before it gets better, tax receipts will be dragged further into the red, said Bloxham economist Alan McQuaid, while Ulster Bank economist Pat McArdle said the tax shortfall for 2008 was likely to be closer to €7.25 billion.

VAT is the category of tax that is running the most behind target, coming in more than €1.6 billion short of start-of-year expectations as a result of the collapse of the housing market and a slowdown in consumer spending. But it was two other property-related taxes - stamp duty and capital gains tax - that were the hardest hit in the month of October. Stamp duty is now €858 million behind target, with the sum collected in 2008 almost half that collected in the same period in 2007. Capital gains tax is trailing by €596 million for the year. Corporation tax is also weak, coming in €558 million lower than expected.

The October figures show that most categories of tax slipped further, although income tax receipts held up better than expected, despite the slowing labour market.

But it is the exchequer returns data for the month of November that is crucial for the economy.