Monthly Exchequer returns are the drumbeat for the government's march towards the next budget. If strong, they provide a double boost for any government proving the strength of the economy and adding to its electoral war chest. Yesterday's figures show that although the rate of increase in tax revenues has slowed since the start of the year, it remains strong thanks to an extraordinary property boom and the stimulus of SSIAs.
Revenues from capital taxation, including stamp duties, capital gains tax and capital acquisition tax, are growing at four times the rate of total taxation and are responsible for the fact that the latter total grew by almost 13 per cent per annum in the year to August. While likely to remain strong until at least the middle of next year, revenue growth to date disguises the growing vulnerability of the revenue base. Of the €25.8 billion in revenue received by the Government between January and August of this year, capital taxes amounted to €3.5 billion.
From a share of just 4 per cent in 2002, this definition of taxes account for 14 per cent of the present total tax take. But even these figures understate the extent of the Government's dependence on the construction sector and housing market: up to one quarter of Gross Domestic Product- the standard measure of our economy's annual output - now comes from construction related activity. A staggering quarter of a million persons are employed in that sector directly, while many thousands more jobs in the services sector are driven by its momentum.
As well as capital taxation, buoyancy seen in Vat and corporation taxes are also flattered by construction and housing market activity. In spite of stronger than expected employment growth and firm wages, income taxes are rising by a mere 4.3 per cent. So, by the end of the year Brian Cowen will be provided with over €2 billion more in revenue than he expected last December. He has so far been prudent. Rather than adding to an already high level of public spending, he aims to reduce last December's target of a €3 billion Exchequer deficit.
The need to persist in this approach cannot be overstated. The month will come in which stamp duties and capital gains taxes will either stop growing strongly or stall. A sharp correction in the property market may even send such revenues into decline. The next government may have the misfortune of discovering this in a quite unpleasant manner. The huge structural change in the tax base under the present Government was neither planned nor foreseen. It arises rather from a failure of Government to adjust the thresholds of stamp duty to account for dramatic increases in house prices.
The Taoiseach and Minister for Finance seem unconcerned by this trend. Controlling many tax levers that drive the construction sector and the housing market, they have the power to ensure that future Exchequer revenue flows are put on a stable footing. Given the reasonable possibility that they will remain in government after the next election, they have the incentive to do it.