Economy to grow in 2010 as tax take stabilises, says Finance

THE DEPARTMENT of Finance is planning to upgrade its economic forecast for the year to allow for growth rather than shrinkage…

THE DEPARTMENT of Finance is planning to upgrade its economic forecast for the year to allow for growth rather than shrinkage.

The shift comes as Exchequer data for the first half of the year points to further stabilisation in the public finances, despite continued sharp weakness in income tax receipts. The latest figures, published by the Department of Finance yesterday, show income taxes were 5.8 per cent behind the Government’s expectations for the first half of the year. In June alone, income tax came in €84 million below forecasts.

Department officials said it was difficult to pinpoint the reasons for the shortfall but acknowledged that shorter working hours, lower hourly pay and people moving into the black economy could be contributing factors. Minister for Finance Brian Lenihan admitted yesterday the labour market was “of concern” but said his tax targets for the year were still achievable.

His officials signalled that they would raise forecasts for the year to allow for “a small positive” in gross domestic product. They had previously expected a 1.25 per cent decline. The more optimistic view comes after this week’s CSO figures showing the economy emerged from recession in the first quarter.

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The officials also highlighted positive trends in areas including consumer confidence and exports.

The Taoiseach, Brian Cowen, last night said recent data confirmed the Government “took the right, although difficult, decisions in last year’s Budget”.

At the end of June, the exchequer had borrowed €8.9 billion, which was almost €6 billion less than at the same point of 2009. The reduction was largely due to one-off factors, including last year’s €3 billion contribution to the National Pensions Reserve Fund and a €3 billion bailout for Anglo Irish Bank. A deficit of €20 billion for the year remained “a valid target”, officials said.

Overall, the State took in €14.4 billion in taxes over the first six months, which was €227 million, or 1.6 per cent, below forecasts. Weakness in income tax was offset elsewhere.

The tax take was almost 9 per cent lower than in the same period of last year but this was largely expected, with the department pencilling in a 6 per cent decline in taxes for 2010 as a whole. Mr Lenihan said taxes were “broadly moving in the right direction”.

On the expenditure side, the Government remains well behind its targets for capital spending in areas such as roads and schools, which came in almost €609 million below expectations. Officials said this kind of spending is “lumpy” and can be set off track by factors such as weather, tender prices and landowners’ appetite to sell property. Day-to-day spending was more or less on target for the first half at €19.7 billion.

Servicing the State’s debt has so far cost €240 million less than anticipated at Budget time, with officials now expecting a €350 million improvement on December’s forecasts for the full year. This would leave the interest charge for 2010 at €4.1 billion.

Fine Gael’s finance spokesman Michael Noonan accused the Government of not doing enough to create jobs, saying the crisis was getting worse. “Following this week’s Live Register data which showed that dole queues have exceeded 450,000 for the first time ever, the exchequer data provides further alarming evidence that the jobs crisis is getting worse,” said Mr Noonan.

Labour’s Joan Burton said the numbers offered no evidence that the economy has “turned the corner”. To make the deficit figures look good the Government had tightened the reins on capital spending, which was a “staggering” 24.8 per cent below profile.