ANALYSIS:JUST AS one swallow does not a summer make, two months' tax revenue is not enough to form a reliable view of the underlying trend at a time when there are major changes in the economy.
Such changes have knock-on effects on tax receipts and there have also been very substantial discretionary changes in both spending and taxes in recent budgets.
That said, the picture is one of broad stabilisation at low levels, though with some worrying unknowns lurking beneath the surface.
Comparisons with 2009 are not that relevant given that the official predictions are for a total tax take this year of €31 billion, which is down 6 per cent on the 2009 figure of €33 billion and they are hugely distorted by the factors cited above. Simplistic attempts to take the €1 billion shortfall on 2009 in the first two months and multiply by six are, thus, likely to be wide of the mark.
The Department of Finance issued the 2010 tax profile a month ago and fixed it so that January came in on target. By contrast, the February figures give us a glimpse of how things are going relative to expectations. The data in the table shows that there was an undershoot of €64 million, or 3.7 per cent, in February, primarily driven by income tax and excises, but offset by higher-than-expected VAT and capital gains tax.
It is too soon to get excited about this but the underlying income tax situation appears to be weak. Moreover, February is not a big VAT month so we will reserve judgment until the end of March when the weak January trend may reappear. Overall, the feeling is one of some trepidation as regards tax revenue prospects this year.
On first glance, spending appears to be undershooting massively but this is a bit of an illusion.
First, we are hamstrung because the department held off issuing the profile of expected voted current and capital spending until yesterday so we have nothing to compare them against.
Officially, the delay was so they could tie them in with the Revised Estimates of spending (REV), which is drawn up after the budget and which gives greater detail on the budget-day spending decisions.
For example, the Minister made a general announcement regarding pay cuts on budget day; this has now been spread over the various departments. In the process, the pay reduction figure turned out to be about €85 million less than that announced in the budget. This reflects the usual swings, roundabouts and estimation errors when one is dealing with an aggregate of about €20 billion.
The €85 million will get lost in the rounding. For the record, only about €3 million of it reflects the decision to row back on the pay reductions of the assistant secretary grade about which there was so much fuss.
The lack of a profile means that we can only compare the January/February figures with last year, which is not very satisfactory.
Voted current spending is down €567 million or 8.1 per cent but this simply reflects the fact that the public sector pensions levy, which reduces the net pay bill, only became effective in March 2009. So the Jan/Feb 2009 base did not reflect any cuts. The lower pay spend in Jan/Feb 2010, by contrast, reflected both the pensions levy and the further pay reductions which took effect on January 1st this year.
When these are allowed for, it appears that current spending may be on target for a zero increase over the year as a whole, as laid out in the budget.
The story on the capital-spending side is broadly similar, albeit for different reasons. Though voted capital was down 25 per cent on 2009 in the first two months, the proportion of the capital budget already spent in those months is actually higher than it was this time last year.
The spending figures appear, therefore, to be broadly in line with the budget-day expectations.
The revenue side appears to be only a little below target but signs of weakness in the two main tax heads – income tax and value added tax – are worrying and all eyes will be on the end-of-March returns.
