Optimism prevails despite shortfall

The deterioration in the national finances continues, albeit at a slightly slower pace. Once you look beyond the range of one-off measures that will be used to balance the book this year, the basic problem remains unchanged.

Revenue is not coming in on target and expenditure is way ahead of budget. The only good news - if you can call it that - is that the rate at which expenditure is growing has moderated.

It is now growing at 21.1 per cent on an annualised basis, compared to 27 per cent at the end of May. It is not much to get excited about when you realise that the Budget-day target for the full year was growth of 14.3 per cent. When they were asked yesterday if they had ever seen expenditure so wildly out of control at the mid-year point being brought in on target for the year, the Department of Finance officials just laughed.

But they conceded that the game was up as far as tax revenues go. The Department admitted yesterday for the first time that tax revenues would not come in on target. The problem lies with income tax receipts - running 13.4 per cent behind the same period last year.

The officials advanced explanations for this, none of which was particularly convincing. They pointed to the impact of the start of the tax year being brought forward from April to January this year. As a result there was a "double budget effect" on income tax receipts as two budgets worth of tax cuts were felt. The most amazing thing about this explanation is that it was put forward as something that was either unexpected or outside the Department's control. Neither of these things are the case. At the very least, it implies a degree of incompetence on the part of the Department if it failed to take this into account in framing the Budget.

The other explanation put forward by the Department is that the economy is growing more slowly than they expected. This is also hard to understand, given that the Budget day forecast of 3.9 per cent is pretty much in line with what most independent economists believe is being experienced by the economy.

It is beginning to look as if the Department of Finance does not know what is going on with income tax. Given its importance as a revenue source - it accounts for roughly one-third of all revenues - this is a very serious issue.

Equally worrying was the admission that corporation tax, the third biggest source of revenue, will also undershoot Budget-day targets. The Minister for Finance, Mr McCreevy, chose yesterday to focus on how he was still on target to achieve the surplus for the year of €170 million that he predicted on Budget day. We now have an explanation for his optimism despite a steady deterioration in the Exchequer finances over the first six months of the year.

Unfortunately, that optimism is not based on a substantial improvement in the Exchequer finances as the year progresses and the economy recovers. It is rather that, through a combination of good luck and some enterprise, the Minister has found some alternative sources of cash to compensate for the missing taxes.

They include the €150 million from the sale of ACCBank, which was being finalised at the time of the Budget. There is also a larger-than-expected profit from the Central Bank and €100 million due from the sale of third-generation mobile licences. The biggest fillip comes from a refund of €280 million in contributions to the European Union budget.

However, the additional unexpected revenue will not be enough to balance the budget if Government spending is not brought under control. No clues were being given yesterday as to how this will be done, apart from the blanket statement that spending pressures were "recognised" and that action was being taken to bring it in on target.

The stage is now being set for next year's Budget. By good luck as much as judgment, the Minister is approaching it with the Government finances in budget but failure to address both the problems in the revenue base and growth in public spending will see him riding his luck next year as well. He must know there is a limit to the number of rabbits he can pull out of the fiscal hat to balance the books and, anyway, in the long term that is not a sustainable strategy.