Goodbody says Irish tax revenues have trebled since 1995; Property-related taxes in Ireland now account for at least 17% of total revenues

Irish
Goodbody says Irish tax revenues have trebled since 1995; Property-related taxes in Ireland now account for at least 17% of total revenues - up from 4% ten years ago
By Finfacts Team
Dec 4, 2006, 16:49

Printer-friendly page from Finfacts Ireland Business News - Click for the News Main Page - A service of the Finfacts Ireland Business and Finance Portal

Goodbody Stockbrokers

Goodbody Stockbrokers says in its latest Irish Economic Commentary that there is clear momentum in the Irish economy. Despite risks increasing beneath the surface, this impetus should carry the economy strongly through 2007. Goodbody expects GDP to grow by an impressive 5.6% next year, a rate similar to 2006. After this golden period for growth, it expects some moderation in 2008, on the back of a slowdown in residential construction and strong base effects on consumer spending due to SSIA maturity.

Goodbody says that at this time of the year, fiscal issues come to the fore. With this in mind, it has looked at some of more important issues around the outlook for the public finances. Tax revenues have jumped three-fold in the past decade. While Ireland’s tax ratio is low in a European context, it has started to tick upwards in recent years. The current government was clearly more aggressive on tax-reducing measures in their first term rather than their second.

Property-related taxes have been an especially important driver of tax revenues. While stamp duty is most visible in this regard, the biggest revenue gatherer is, in fact, VAT receipts from residential construction, which accounts for c.8% of total revenue. Goodbody estimates that property-related taxes have accounted for up to a third of the increase in the total tax take over the past two years. Property-related taxes now account for at least 17% of total revenues, up from 4% ten years ago. As the property market slows, the scope for further upside revenue surprises is limited.

Goodbody Stockbrokers

Goodbody Chief economist Dermot O'Leary says, in this regard, the housing market is in the midst of a measured slowdown. Price inflation has moderated and we expect this to continue into 2007, when 5% growth is expected (from 12% in 2006). Helped by property tax incentives, house completions will peak this year at 92,000 units, but supply intentions remain strong for 2007 (88,000 units expected).

O'Leary says that Irish consumers have coped well with the onset of higher interest rates. While retail sales have slowed somewhat in recent months, car sales have had a major impact on this performance. With no signs as yet of a SSIA spending splurge, consumers may be holding off purchases for the New Year. Goodbody expects consumer spending to grow by 6.4% in 2006 and 7.0% in 2007.

Ireland didn’t escape the wrath of rising inflationary pressures in 2006. However, two major contributors - energy and mortgage interest - are unlikely to prove as inflationary in 2007. Goodbody expects inflation to moderate to 3.3% in 2007, from 3.9% in 2006.

Dermot O'Leary says that while the government has spun the line of a prudent, fiscally sustainable Budget package, spending is still likely to increase by c.11% in 2007, providing further stimulus to a fast growing economy. However, he welcomes the decision to accelerate capital spending growth and says that the full roll-out of the National Development Plan is a necessary condition of Ireland’s favourable long-term growth potential.

Goodbody Stockbrokers

How have tax revenues performed in recent years?

Total government tax revenues expanded from just under €15bn to €39.5bn in the period from 1995 to 2005. A figure of of over €45bn is likely by the end of 2006. In 2002, revenues had almost doubled from the 1996 level, while revenues in 2006 are likely to be more than three times that of a decade earlier. The government can certainly not complain about a lack of resources.

With the exception of 2001 and 2002, tax revenues have been growing at rates in excess of 10% per annum consistently. Indeed, in the late 1990’s annual growth in tax revenues was running at over 15% yoy. Since the deceleration in 2001 and 2002, growth in tax revenues have picked up strongly, with this year’s receipts likely to be c.16% ahead of 2005 levels. We will review the forecasting record of the Department of Finance later in this piece.

Download report