Finances in even worse condition than we had feared

 

ANALYSIS:The exchequer figures portray a devastating decline in State receipts, with annual takings set to be up to €12 billion less than calculated in the Budget. New taxation methods are the answer

ORDINARILY, THE February exchequer statement attracts scant attention. It is usually too early in the year for meaningful extrapolations to be made.

This time it’s different. The public finances are in such desperate straits and the pace of deterioration so rapid that each fresh increment of information demands analysis.

What are we to conclude from an analysis of the latest increment? Well, it’s hard to escape the conclusion that the public finances are in even worse shape than we had suspected. It’s no surprise therefore that the latest figures have prompted the Government to signal a mini-budget before the end of the month.

Tax receipts in the January-February period were just under €5.8 billion. This compares with €7.6 billion in the same period of last year, a decline of 24 per cent.

Typically, the first two months account for about one-sixth of receipts for the full year. On this basis, tax revenue for 2009 might amount to €35 billion. That would be €2 billion short of the Government’s revised projection of early January, the projection upon which the revised official target of a budget deficit of €17 billion (9.5 per cent of gross domestic product or GDP) for the year was based.

However, in circumstances where the underlying trend in revenues is strongly downward, the first two months’ receipts will likely account for a higher-than-usual fraction of the full-year total, and so there is reason to fear the shortfall will be much greater than €2 billion.

Looking at individual tax heads, it is worth distinguishing between two broad types. First, there are those – capital gains tax and stamp duties – where revenues were already in free fall this time last year.

In respect of these categories, the pace of decline has accelerated steeply. For example, capital gains tax receipts – which fell 39 per cent in the first two months of last year – fell a further 73 per cent in the first two months of this year.

The net result is shrinkage so great as to amount to near-disappearance. In the case of capital gains tax, receipts in the first two months of this year were 83 per cent lower than in the same period of 2007. The equivalent rate of contraction in respect of stamp duties was 77 per cent.

Then there are those tax heads where receipts were still holding up reasonably well this time last year – VAT, excise duties and income tax. In each, the rot has since set in with a vengeance.

This is especially evident in respect of expenditure taxes: in the January-February period, excise duty receipts were 33 per cent down on the same period of 2008; and VAT receipts were 17 per cent down. This points to an evaporation of large chunks of retail business in the early months of the year.

It is bitter testament to the grim condition of the public purse that the best-performing tax head in January-February was income tax, where receipts were only 7 per cent lower than in the same period of last year.

After seeing the January returns, I projected 2009 tax revenue of €34 billion. At the risk of appearing trigger-happy, this latest set of numbers would tempt me to cut that forecast significantly further.

At this stage, it is not difficult to see tax receipts for the year coming in as much as €5-6 billion below the Government’s revised forecast (or €11-12 billion below the projection contained in the Budget last October). To bridge a gap of this magnitude in the upcoming mini-budget would be a Herculean task – that is to say it would be impossible.

Still, a serious attempt must be made to reduce the gap and there is a growing consensus around the proposition that raising taxes must play a part in that attempt. It is not hard to see why that is so.

At existing tax rates and, on the basis of the latest available macro forecasts for the economy from the likes of Davy and Goodbody, which envisage a volume decline of 6-7 per cent in GDP this year, it looks like the tax/GDP ratio will fall to about 18.5 per cent in 2009 from 25 per cent in 2007.

Even stripping out those tax categories that are especially sensitive to construction and property, the overall tax burden seems set to fall by 3.5-4 percentage points in the absence of countervailing measures. The big policy questions now are what taxes to raise and how.