ANALYSIS:THE GAP between actual and budgeted tax receipts widened significantly further in November.
The projection at the time of the Budget was that tax revenue in 2008 would be 3.5 per cent ahead of the 2007 level. In the event, receipts for the first 11 months of the year were 13 per cent lower than in the corresponding period of 2007. November receipts, at €7.4 billion, were 24 per cent down.
The pattern revealed by the November data was predictable for the most part.
Property-related taxes were weakest, as they have been year-to-date. Receipts from capital gains tax and stamp duties were scarcely one-third of their level of 12 months earlier. Receipts from VAT, income tax and corporation tax were also well down on their year-earlier levels, albeit to a much lesser degree. On the other hand, revenue from excise duties in November was 15 per cent up on the same month of 2007, a repeat of what happened in October. The increases in duties announced in the Budget are clearly a factor here, but don't provide a full explanation. This curious phenomenon is difficult to reconcile with the apparent upsurge in cross-Border shopping.
At the time of the Budget, the Department of Finance was expecting a revenue shortfall of €6.5 billion for 2008. On the basis of the data then available, it seemed that the shortfall would be €7-€8 billion. Yesterday's data point to an outcome towards the top of this range. The December figures could yet materially alter this picture, but in the likely event that they don't, an obvious question will arise: why, with just three months of the year left, could the department not get it right but commentators could?
A matter that will concern the department will be the trend and forecast error regarding corporation tax. In October, the official forecast of these receipts for the full year was €6 billion.
Now, barring a miracle in December, the out-turn looks like being about €5.2 billion. This would be the lowest yield from this source since 2003. Moreover, this year's yield from stamp duties is set to be the lowest since 2002 and the yield from capital taxes the lowest since 2004. All of which underlines the windfall nature of a large part of Government revenues in the intervening years.
The emerging revenue shortfall means that this year's Budget deficit will be about 6.2 per cent of GDP (compared with the 5.5 per cent official estimate of a few weeks back). Other things being equal, it would mean that next year's deficit would weigh in at about 7.3 per cent of GDP, and that figure is predicated on the realistic official forecasts of economic activity for 2009.
Adjusted to reflect the arguably more realistic forecasts favoured by private sector analysts, next year's deficit could comfortably reach the 8-9 per cent range on the basis of existing tax and expenditure policies.
The latest figures will intensify the pressure on public spending generally. In this connection, a particular question that may well be canvassed with increased frequency in the period ahead, is whether conditions have changed sufficiently since the pay agreement was arrived at in mid-September to warrant the renegotiation of that deal.
At that time, the Government expected as much as €3 billion more in tax receipts this year than it now seems likely to get, and at least that much more than now seems likely in 2009. Moreover, in the intervening period, forecasts of inflation have come tumbling down as the implications of what's happening in the economy are better understood. Some analysts are now expecting an average inflation rate of zero in 2009.
