State must borrow €2bn more as taxes fall

THE GOVERNMENT will have to borrow €2 billion more than it expected to finance the running of the State after continued weakness in the economy led to lower than anticipated tax revenues in the first nine months of the year.

The latest Exchequer returns published by the Department of Finance yesterday show a large shortfall in the amount of VAT and income tax collected by the Government compared to the sums they had forecast in April.

The figures point to further cuts in Government spending in the next budget as it seeks to stabilise the public finances.

Tax receipts took a turn for the worse in September, and are now 16.8 per cent or €4.8 billion down on the first nine months of last year.

At €23.7 billion, the amount of tax collected is already €965 million behind the department’s projections, and the shortfall for the year as a whole is now likely to be double that. This means that instead of collecting an anticipated €34.4 billion in tax in 2009 the department’s new target is in the region of €32.4 billion.

The Exchequer borrowing requirement for 2009 is now likely to be at least €26 billion. This comprises the €20.35 billion borrowing requirement cited in the supplementary budget, the €4 billion that was subsequently injected into Anglo Irish Bank and an additional €2 billion as a result of the tax shortfall.

The Department of Finance has also revised down its target for the General Government Deficit, which it now expects to be -12 per cent of GDP rather than the -10.75 per cent it forecast in the supplementary budget.

At the time of the supplementary budget in April, the Government said the measures introduced would reduce the deficit for the year from a projected -12.75 per cent to -10.75 per cent. However, its revised forecasts suggest that most of the benefit of the supplementary budget has been wiped out by the subsequent deterioration in tax receipts.

Weak VAT receipts account for €653 million of the tax shortfall to date, while income tax has slipped €479 million behind projections.

The Department of Finance now expects that VAT receipts in November, the next big month for VAT collection, will also be weak, while it is forecasting that income tax collected from self-assessed taxpayers in October and November will mirror the negative trends in PAYE receipts.

However, the National Treasury Management Agency (NTMA) has indicated that debt-servicing costs may be slightly lower than expected, while the Government expects the number of unemployment benefit claimants this year will be lower than the projected monthly average of 440,000.

“It is evident now that what was factored in for the Live Register in the budget was too high and there will be savings,” said Michael McGrath, assistant secretary in the department. The monthly average of claimants this year is now expected to be in the “low 400,000s”, he added.

The department estimates that every 1,000 people on the Live Register costs the Exchequer €13 million.

Alan McQuaid, economist at stockbrokers Bloxham, said the pressure on Mr Lenihan to deliver a “very tough” budget in December had now “increased dramatically”.