ANALYSIS:THE MARCH exchequer statement unsurprisingly revealed another set of very weak tax numbers. Total receipts in the month were 22 per cent lower than in March of last year. The Government will have taken some consolation from the fact that this pace of decline, though steep enough, was not as steep as the 31 per cent year-on-year drop that took place in February.

Of course, tax receipts are quite volatile from one month to the next. A better indication of the underlying trend therefore is provided by the quarterly data. These showed total receipts in the first quarter of the year of €8.5 billion, about 23 per cent below the corresponding period of 2008. This is not much different from the year-on-year fall of the previous quarter and suggests perhaps that the acceleration in the pace of decline in overall tax revenue that was evident through 2008 is at an end.

The composition of tax receipts is very different now from what it was as recently as two years ago. In the January-March period just ended, capital gains tax and stamp duties together accounted for just over 4 per cent of total tax revenue, down from 16 per cent in the first quarter of 2007, while the share of income tax in the total was 34 per cent, up from 25 per cent in the first three months of 2007.

Much emphasis has been placed of late on the need to shift our tax system away from its boom-time reliance on property-related revenues and towards more durable sources like income. What these figures show is that this type of compositional shift is occurring automatically and at some speed. For policy to give it significant further impetus runs the risk of pushing the shift too far. Even under the present tax code, that is before accounting for whatever changes will be announced on Tuesday, the share of income tax in the total this year will probably reach its highest value since the early 1990s. Thus, while it is clear the Government needs to increase taxes to help address the crisis in the public finances, the additional revenue should be raised in a balanced way across a range of tax categories and not disproportionately from labour income.

Yesterday evening also saw the publication of revised economic and fiscal forecasts for 2009. It reiterates its expectation that tax revenue (on a pre-budget basis) will be €34 billion for the year. That implies an inflow of €25.5 billion over the balance of the year, a reduction of just 14 per cent vis-à-vis the same period of 2008 and a considerable deceleration in the rate of decline from the 22-23 per cent registered in the last two quarters. This seems optimistic. Some knowledgeable observers are speculating that revenues might struggle to break the €30 billion mark. Perhaps such forecasts are overly pessimistic, but they do suggest that plenty of downside risk continues to attach to the official projections.

Underpinning the official tax revenue projection is the latest set of macroeconomic forecasts from the Department of Finance, which envisage a 6.75 per cent volume fall in GDP this year. This is a sharpish downward revision from the 4.5 per cent fall forecast three months ago, but again one wonders how realistic it is, given the downward momentum implied by the quarterly profile of GDP in 2008 and the latest increments of information we have about the state of economic activity since the start of the year. Given the data published for 2008, an average annual fall in GDP of only(!) 6.75 per cent in 2009 would require that the average level of GDP this year be just 1.8 per cent lower than its Q4 2008 level.

Expectations of a 10 per cent fall in real GDP this year no longer seem outlandish. A good case can be made for the Government to adopt forecasts that err on the side of pessimism in order to protect the fiscal targets it adopts next Tuesday from the risk of further slippage. As Jens Henrikkson says in his celebrated manual on fiscal consolidation*: “It is of great importance that the Minister for Finance is conservative when it comes to prognosis”.

*“Ten Lessons About Budget Consolidation”, Bruegel Essay and Lecture Series, 2007