ANALYSIS:December's figures are welcome but the extra revenue did not come from higher spending or income so an economic rebound is not signalled, writes PAT McARDLE
THE END of December exchequer returns are frequently a bit of a damp squib. They come just a month after the budget and usually show little change on the budget-day estimates for the year just ended.
Before yesterday, there were only two months in the previous two years when tax revenue surprised on the positive side and these were minor affairs. The general picture was one of undershoots and disappointments.
December changed all that.
In one month alone, there was a positive variance of almost €500 million. One would have to go back years to find a precedent. To put it in context, the average monthly shortfall in the eight months to November was €170 million. The worst month was September when the shortfall was €539 million.
The year ended on a positive note, albeit that the department officials tended to play it down. Perhaps this was wise. One can imagine the Opposition latching onto this.
If we are €500 million better off in one month, could we be €6 billion to the good in a year? Unfortunately, the reality is more mundane.
In nominal or current price terms, the Irish economy has contracted by about 20 per cent from the peak in 2007. Some 7 percentage points of this occurred in 2008. A further 9 per cent was registered in the first quarter of last year. Since then, the fall has been a more modest 4 per cent. The tax figures reflect this pattern of events.
In fact, the tax revenue figures can be a leading indicator. For example, yesterday saw the release of the full 2009 data but the Central Statistics Office will not issue preliminary growth estimates for the fourth quarter until next March.
We can use the tax figures to draw inferences about how the economy has performed in recent months.
The department made a valiant effort to put a stake in the ground last April – the budget was based on growth forecasts that were more cautious than those of either the Central Bank or the Reuters consensus of private sector forecasters.
At that stage, it was envisaged that the General Government Deficit would be €18.4 billion or 10.75 per cent of GDP. The associated exchequer borrowing requirement, a related but different concept, was €20.4 billion.
The April budget assumed tax receipts of €34.4 billion. There was so much focus on the latter number that many will remember it.
Three months later, the Minister was able to report that the end-June exchequer returns were close to the department’s estimates for that point in time and that spending, while lower than anticipated, was also close to target.
However, the position deteriorated over the summer and the 2010 Budget was based on a 2009 tax shortfall of €1.8 billion. The outcome was a €1.3 billion undershoot because December brought in €0.5 billion more tax than was forecast just a month ago.
The economy did not boom in December; it would be more correct to say that it did not weaken further.
The December tax returns add to the tentative conclusion reached in recent months that the economy may have bottomed out in a very general sense. The detail of where the additional €473 million came from in December lends weight to this conclusion. The biggest contribution came from capital gains tax (€157 million). This can be put down to an estimation error.
Payment dates for capital gains tax have shifted around a lot in recent years and tax on gains in the first 11 months is now paid in December. This tells us little about the state of the economy in recent months.
It was followed by excises which overshot by €128 million. Most of this reflected tobacco and oils where strong pre-budget withdrawals from bond were evident. It appears that people bet incorrectly that there would be excise hikes in the budget.
Another €100 million came from higher corporation tax.
The point about all this is that the extra revenue did not come from higher spending or income and so is not indicative of a rebound in the economy.
Spending was well controlled. Net voted expenditure was €221 million or 0.5 per cent below profile.
This reflected savings on unemployment assistance of about €600 million (the Live Register came in significantly below the April estimates) offset by higher spending elsewhere.
Capital spending was on target, which is welcome.
The upshot was an exchequer borrowing requirement of €24.6 billion, including €4 billion to recapitalise Anglo Irish Bank.
The department did not produce figures for the General Government Deficit outturn.
We can deduce that this was about €18.6 billion or 11.4 per cent of GDP instead of the 11.7 per cent forecast in the December Budget. Final data on this does not become available until March.
While we can take some comfort from the better-than-expected 2009 outcome, this has little implication for the 2010 budgetary parameters.