Making a dead letter of Budget 2009

The extent of the decline in revenue buoyancy, as shown in yesterday's Exchequer figures, is still remarkable, writes Jim O'Leary

BY THE time it was published, yesterdays Exchequer Statement for December had been robbed of its potential to shock, partly because the contents of earlier statements had inured the audience to shocks and partly because the prospect of an €8 billion tax shortfall for 2008 and a budget deficit of over 6 per cent of GDP had already been well canvassed. Still, it is remarkable how far the tide of revenue buoyancy has receded. The total tax take in 2008, at €10.8 billion, was 14 per cent lower than in 2007, more than 10 per cent lower than in 2006 and less than 4 per cent higher than the 2005 figure.

Individual tax heads paint an even starker picture. Receipts from capital taxes last year were not much more than half the previous year's, and lower than in any year since 2004. Receipts from stamp duties were lower than in any year since 2002.

That property-related taxes should evince such behaviour in the midst of a collapse in the construction/property sector is understandable. What is a little more surprising and worrying is the behaviour of corporation tax receipts, which fell by 20 per cent last year and also to their lowest level since 2002.

Two other features of the tax figures are worth noting. First, they confirm that the rate of deterioration continues to gather pace. In the final quarter total receipts were 22 per cent below the corresponding period of 2007, compared with year-on-year declines of 10 to 12 per cent in the middle two quarters and just 6 per cent in the first quarter. The second feature is the gradual spread of the malaise across tax categories. Income tax and VAT receipts, which had been rising on an annual basis in the first quarter, were running well behind by year-end. Excise duties, which displayed unexpected buoyancy in October and November, collapsed in December.

Yesterday's numbers make a dead letter of Budget 2009 as presented in October. At that stage, the Department of Finance was projecting tax receipts of €42.8 billion this year, a 1 per cent increase on its estimated 2008 outturn. The actual outturn for 2008 is now known to be €1.6 billion lower than expected, while the economic outlook has deteriorated sharply in the intervening period such that the department is now indicating its expectation of a 4 per cent fall in real GDP in 2009 compared with the fall of less than 1 per cent expected at Budget time. Allowing that the outlook for the general level of prices has also weakened in the meantime, this suggests that tax revenues this year might be about €4 billion lower than the projection on which the Budget was based. Assuming unchanged policy on the spending side, this in turn would be consistent with an overall budget deficit of over 9 per cent of GDP.

Bleak though this analysis may be, the balance of risks around it is slanted to the downside. In the first instance, it seems more likely that GDP will contract by more than forecast rather than less.

Secondly, the tax projections outlined above assume that the decline in receipts in 2009 will be proportionate to the decline in nominal GDP. But this was far from being the case in 2008 when tax receipts fell 14 per cent in the face of a 3 to 4 per cent decline in the value of GDP. The critical question here is whether there is scope for a further disproportionately large drop in revenue from capital taxes, stamp duties and corporation tax even after the very sharp falls registered in 2008. I'm afraid the answer to this question is yes.

That being the case, a budget deficit well in excess of 10 per cent of GDP cannot be ruled out under existing policies.

Even in the context of deteriorating trends globally, a deficit of this order of magnitude is likely to be much greater than that recorded by any other first world government in 2009, and financing it could prove very expensive. Already Irish Government bonds are trading at yields 1.3 per cent above their German equivalents, having been at close to level yields a year ago. There is clearly a case for implementing fresh measures to rein in the deficit. Even more importantly, there is an urgent requirement for the Government to put together and publish a credible and coherent plan to restore balance to the public finances over the medium term.