The jury is out on whether the projected annual Exchequer surplus can be achieved, writes Dan McLaughlin

In essence, the Irish Budget is a simple process: the Minister for Finance projects how much revenue he will raise and then decides how much of this he will spend.

Yet the Minister can control only one side of this process, as tax receipts are a function of economic activity, which is both difficult to predict and subject to influences far beyond the domestic environment. Some years, this may mean an unexpectedly large Exchequer windfall, as in 1999 and 2000, when tax receipts exceeded the original targets by a cumulative €3 billion; other years, it can mean a large revenue shortfall.

This was certainly the case in 2001. Tax revenue came in a massive €2.6 billion shy of the original Budget target, which meant the Exchequer ended the year with a surplus of under €650 million, instead of the anticipated €3.2 billion. In that sense, it is nonsense to talk of "squandering the surplus" as it only existed on paper as a Budget projection which never materialised.

It is not surprising then, after such a spectacular error, that the Department of Finance probably erred on the side of caution in its tax projections for 2002, which looked undemanding at the time, particularly as the figures included higher tax rates in terms of excise duties and VAT.

That said, the 2002 Budget was also notable in that the Minister, Mr McCreevy, augmented projected revenue with a series of off-balance-sheet receipts, including money from the social insurance fund and the Central Bank.

This represents a calculated risk on his part - if the economy picks up and tax revenue growth accelerates, the underlying budgetary position will improve; but if the economy falters in 2002, the incoming finance minister will face the prospect of a large shortfall in Exchequer finances in 2003, in the absence of corrective action on Exchequer spending and tax rates.

On the evidence of the first quarter, the jury is out. The Exchequer recorded a healthy surplus of €608 million, including a surplus on day-to-day spending of €1.3 billion, but tax receipts are running below last year's level, which implies a deterioration in the underlying budgetary position.

On the positive side, the growth in Exchequer spending is beginning to moderate, moving nearer the Budget target, and there are a number of extenuating circumstances on the tax side which may give way to stronger revenue growth later in the year. For the moment, it is too early to say whether the gamble will pay off.

Excise duty was raised on cigarettes and petrol last December and this is evident on the revenue side, with receipts from excise running over 14 per cent up on the same quarter of 2001, well ahead of the annual growth of 8.7 per cent projected in the Budget.

Capital taxes too are shaping up relatively well, in that they are flat on last year against a sharp fall projected for the year as a whole.

The excise figure would imply that consumer spending has picked up but VAT is still running behind target, albeit only one month into the new 21 per cent regime, up from 20 per cent last year. Consequently, some acceleration in VAT receipts is likely as the year unfolds.

Corporation tax receipts are well behind target, but this is due to timing factors. Of more concern is the trend in income tax receipts, with revenue here over 3.5 per cent down on the first quarter of 2001. Income tax accounts for around one-third of tax revenue so a pick-up in this heading is necessary in order to avoid another shortfall in the overall tax take.

The trend on the expenditure side is much more encouraging. Voted current spending grew by 16.5 per cent in the year to March, compared with growth rates well in excess of 20 per cent in January and February, and is much closer to the 14.7 per cent figure projected for the full year.

Total current spending is still rising at some 20 per cent, against a 12.7 per cent target, but this reflects lumpy debt payments and these will even out as the year progresses and, as such, there is every chance that spending will not substantially overshoot the Budget target.

Potential overshoots can always be corrected on the spending side, if the political will is there, but revenue is another issue. There is as yet no compelling evidence of this in the tax data and it needs to materialise if the Exchequer surplus planned for 2002 is to be realised.

Dr Dan McLaughlin is chief economist. Bank of Ireland.