The slowdown in tax revenue for the year so far should give the Government pause for thought. This is the first time since 1995 that tax revenues are running below official expectations at the end of the first quarter. The Government is targeting a surplus at the end of the year of £2.54 billion, which equates to a general Government surplus of 4.3 per cent. For once, the worry is not that the Government's targets will be exceeded but that they could be undershot. This could be critical to the ongoing negotiation with the European Commission over the broad economic guidelines. Any further fall in the size of the surplus is likely to be met with condemnation in Brussels.
Some slowdown was expected following the faster than expected drop in US growth as well as the foot-and-mouth disease outbreak. However, the scale of the drop across some tax heads did surprise even the Department of Finance. It is possible the Department has been more accurate than usual this year in its forecasting and that revenue may pick up again over the rest of this year. However, the balance of probabilities has to be a continuation of the slowdown. Tax revenues are 9.2 per cent ahead of last year. That may be a figure that many other states "would give their eye teeth for" as a senior Department official said yesterday, but it is still below the 12.5 per cent increase the Department expects for the year as a whole. The primary reason for this slowdown appears to lie in falling receipts for excise duties and lower than expected VAT receipts. The Department believes the foot-and-mouth crisis is largely responsible for this. With many citizens eschewing travel both petrol and alcohol receipts have been hit, according to the Department. However, it will be at least several weeks before this theory can be confirmed. The longer the foot-and-mouth crisis continues, the larger the reduction in excise duties and VAT can be expected.
But there are also costs on the spending side. A concern is that the Department has not yet come up with any estimate of how much foot-and-mouth is likely to cost the Exchequer. Overtime has not been paid or calculated yet for the Garda, the defence forces or Department of Agriculture officials. There is also no estimate yet of likely bill for compensation to farmers or the cost of culling. The policy has been to get on with it and then see how much it costs. Even before this spending hits the Exchequer, day-to-day spending is already running 21 per cent ahead of last year, broadly in line with Government expectations. The pressure from foot-and-mouth, EU measures on BSE and the new Government savings plan will only add to the pressure.
The data also underlined the figures released last week which showed that, in contrast, capital spending is behind target. It is even running behind the downwardly revised target of last week. This is of concern as investment in infrastructure and services, such as childcare, health and education, is vital in order to continue attracting and keeping multinational firms. However, we need to keep things in context. The Irish economy is still running a substantial surplus of £1.15 billion in the first three months of the year and we are still talking about a modest slowing down rather than a recession.