Public finances €2.5bn better than expected

Construction and consumer spending combined to leave the public finances €2.5 billion healthier than expected last year. This leaves the Exchequer in a solid position as the Government enters 2006 on an election footing, writes Una McCaffrey

Figures released yesterday by the Department of Finance show the Government needed to borrow €499 million to fund its spending programmes in 2005. This compared to the borrowing requirement - or deficit - of nearly €3 billion that it had pencilled in at the start of the year.

The undershoot in borrowing reflected an unexpected surge in tax revenue and on the other side of the public finances, a €705 million shortfall in the amount Government departments had planned to spend on capital and day-to-day projects. Despite this, Government spending still rose by a healthy 9.3 per cent last year, with the Government planning to carry over €346 million of its capital allocation into 2006.

Minister for Finance Brian Cowen described 2005 as "a good year for the public finances" but warned the same positive drivers would not necessarily be in place this year.

He pointed out that 80 per cent of the €1.75 billion overshoot in tax revenues was due to extra stamp duty, "bumper" capital gains tax receipts and an unexpectedly high contribution from special tax investigations led by the Revenue Commissioners.

"We do not expect a similar performance from these taxes in 2006," said Mr Cowen. The Department of Finance had expected a €200 million gain from Revenue special investigations in 2005, but they produced €511 million, the bulk of it from inquiries into single premium insurance policies.

Without this income tax receipts would have come in about €350 million or about 3 per cent below the department's expectations for the year. This was surprising in light of the strong employment figures recorded last year, with 96,000 new jobs at the end of the third quarter.

Barra O'Murchadha, principal officer in the department's budget and economic division, suggested the lack of correlation could reflect a surge in lower-paid jobs which do not incur significant income tax payments.

A breakdown of the overall tax figures shows that while corporation tax was also slightly below target, all other tax heads surpassed expectations last year. While taxes related to property and construction were key to this, Mr O'Murchadha said cigarette and car sales had also provided a boon for the Exchequer. Vehicle registration tax alone was €108 million ahead of forecasts, while general excise outperformed by €158 million.

VAT, which also reflects consumer demand, delivered €464 million more than expected, while stamp duties brought in a surplus of €640 million. Capital taxes beat forecasts by €529 million.

Mr O'Murchadha said the surge in property taxes reflected housing and non-residential construction almost equally. "Like most commentators, we had been anticipating that the buoyant property market would start to ease," he said, adding that a slowing is again expected in 2006. "This year, we're not expecting a dive, we're expecting it to level off," he said.

Explaining the spending undershoot, Tom Heffernan, principal officer of the Department of Finance's public expenditure division, said the timing of large capital projects was hard to judge. The department attributed a capital underspend of €141 million largely to the Departments of Transport and Environment, Heritage and Local Government, the Health Service Executive and the Office of Public Works. A €564 million saving on the current side was drawn from across all departments.

Opposition parties last night criticised the Government's budgetary process and forecasting record. Joan Burton, Labour's spokeswoman on finance, said "a small fraction" of last year's €2.5 billion overshoot would have made a huge difference to people's lives.

Richard Bruton of Fine Gael said the final Exchequer figures reflected the Government's "insatiable appetite for revenue on the back of the taxpayer".