A STEEP deterioration in tax revenues in July may force the Government to revise upwards its projection for a €3 billion tax shortfall this year. HARRY McGEE and LAURA SLATTERYreport
Official figures published yesterday show that the amount of money the Government collected in tax in July was €776 million below its expectations for the month.
This was by far the biggest monthly shortfall so far in 2008 and points to a further slowdown in consumer spending.
Tax revenues are now €2.2 billion or almost 9 per cent behind target for the first seven months of the year. If the pattern continues, Government borrowing will breach the EU guidelines of 3 per cent of gross domestic product (GDP) by the end of 2008, despite the programme of spending cuts announced last month.
However, sources within Government said that no decisions on revising projections or otherwise would be taken until September.
The sources said that at that stage it would be possible to make an assessment about whether the poor July figures were a once-off or part of a more serious trend.
Economists yesterday described the figures as "disappointing", while Fine Gael TD Olivia Mitchell said they pointed to a "deep and broad recession" that represented "the worst deterioration in the public finances in the history of the State".
A substantial drop in VAT receipts was partly to blame for the poor figures, as a slump in retail sales in May and June exacerbated the effect of the struggling property market on the VAT intake.
The VAT shortfall accounted for €450 million of the overall monthly deficit, a poor performance that Ulster Bank chief economist Pat McArdle described as "breath-taking". VAT receipts for the year are more than €1 billion or 10.6 per cent below the estimates made by the Department of Finance in January.
Every major category of tax collected by the Government fell below target for the second month in a row, with taxes related to the property market trailing the most behind target. Stamp duty receipts for the year so far are some €332 million or 22.5 per cent lower than had been forecast in January. As the housing downturn proved more pronounced than expected, capital gains tax also fell and receipts are now 38 per cent or €406 million below forecasts.
Income taxes are holding up the best, coming in at €92 million below expectations for the year, which is just 1.3 per cent below target.
But the latest figures could have a serious knock-on effect on the State's borrowing requirements.
If the trend signalled by the July figures continues, it will leave Government borrowings in excess of the 3 per cent EU limit, notwithstanding the €500 million cost-savings programme announced by Minister for Finance Brian Lenihan last month.
Mr McArdle yesterday forecast a €4.5 billion shortfall in tax revenues, which would leave the exchequer deficit close to 3.5 per cent of GDP.
The forecast is based on the average monthly shortfall in tax revenue of €318 million continuing to accelerate.
Davy Research economist Rossa White painted a slightly brighter picture, forecasting a €4 billion tax shortfall. He said the State would not breach the 3 per cent EU deficit limit, but he added that it would be "very tight".
However, Fine Gael last night echoed Mr McArdle's forecast of a €4.5 billion tax shortfall. Ms Mitchell said Mr Lenihan's economic predictions had already been "blown clear out of the water" by the "stark" figures in the July exchequer returns.
"We are now witnessing the culmination of years of soft option politics from Brian Cowen," said Ms Mitchell who also accused Mr Lenihan of not understanding the scale of the crisis.
The Labour Party's Senator Alan Kelly said real political leadership was now required.
"The Taoiseach and those around him seem paralysed in the face of the economic problems now swamping them," he said.
The overall exchequer deficit for the year is now running at €6.7 billion, up from €5.6 million in June. It compares with a deficit of €1.3 billion at this point in 2007.
As of last month, the Government was projecting that the overall deficit would be €7.8 billion for the year, taking into account its prediction of a €3 billion tax shortfall.
Tax receipts up to July 31st were €22.67 billion, down from receipts of €25 billion for the same period last year. Expenditure for the first seven months of this year is €31.1 billion, which is in line with the Government's targets. Mr White said it was critical that the budget for infrastructure projects remained untouched.