Irish Exchequer deficit was €3.9bn in October; Davy says there is compelling case for tax cuts to bolster consumer spending in 2008

Irish
Irish Exchequer deficit was €3.9bn in October; Davy says there is compelling case for tax cuts to bolster consumer spending in 2008
By Finfacts Team
Nov 3, 2007, 01:55

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

Tánaiste and Minister for Finance Brian Cowen TD

The Exchequer figures for October, issued by the Department of Finance Friday evening, show that for the first ten months of the year the Government's total tax revenue was €34.9 billion - 1.7% below the Budget 2008 targets.

Stamp Duties are 16% below target at €2.7 billion, and Capital Gains Tax were 13.4% below target at €1.3 billion, reflecting the slowing property sector.

The Department had expected to collect €3.2 billion in Stamp Duty and €1.5 billion in Capital Gains Tax by the end of October.

Income tax receipts are ahead of target at €10.3 billion - up 12.5% in the year to date compared with a Government forecast of 9.3%.

There was an Exchequer deficit of €3.9 billion for the first ten months of the year.

Income Tax over the ten months was 2.9% higher than expected at €10.3 billion.

The Department had expected to collect €4.9 billion in Excise Duty by the end of last month, but the figure was 4.1% lower at €4.7 billion.

Spending is up 17% more than in the corresponding period last year.

Davy economist Rossa White commented:

Tax revenue shortfall still heading for €1-€1.25bn

We suggested in early July that tax revenue may fall €1bn behind target in 2007. That is probably the lower bound estimate; the shortfall may reach €1.25bn.
But the picture is somewhat brighter after a jump in income tax returns in October.
Income tax receipts are 3% or €300m ahead of target year-to-date (ytd).
Housing-related revenues continue to struggle: stamp duties were down 30% in October and 9% year-on-year in January-October. November is crucial for capital gains returns (CGT) - more than 50% of the full year total will be delivered. We expect CGT to slip close to €500m behind target by year-end.

Expenditure broadly in line with target

Total expenditure is up 17.5% ytd versus a government forecast of 17.0%.
Capital spending is ahead of target, although it will probably end up in-line, while current spending lags.
Tax cuts are required - the government has the resources
Unfortunately, fiscal policy has tended to be pro-cyclical in Ireland over the last decade i.e. we spent the tax windfalls as they arose, but tightened up when revenue slowed.
There is a compelling case for tax cuts at this point in the cycle to bolster consumer spending in 2008. We would like to see income tax cuts of at least 1bn, similar to the tax reductions in Budgets 2006 and 2007. If income taxes were reduced by 1bn or so (which takes into accounts indexation of tax credits), the General Government deficit would not exceed 1% of GDP in 2008. That is well within the Maastricht 3% limit.

Pat McArdle, Chief Economist of Ulster Bank commented:

October was another weak month with tax receipts undershooting the Dept of Finance profile by €140 million, albeit that this was significantly less than the undershoots of the two previous months, €257 million and €218 million, respectively.

Property taxes were again the source of the weakness – stamp duties were down €71 million, and CGT down €42 million. However, the stamps shortfall was the lowest in five months and value added tax, which was quite weak in both August and September, actually exceeded the target by €32 million. Oct was, thus, a mixed picture – weak but not as weak as some of us expected. This experience was in line with the Department of Finance guidance at the end-Sept Press Conference that the shortfall for the year might be slightly below €1 billion and slightly at odds with the views of outside commentators, ourselves included, that the shortfall might be higher. With ten months gone, the cumulative shortfall is €630 million.

Having said that, everything still hinges on November when €11 billion, or 22% of the yearly tax take, is due. Half of all CGT and Corporation tax is paid in November so a few hundred million could easily get lost. October was less weak than expected, if that trend continues, the Department’s forecast will be close to the mark. If there is renewed weakness, the Dept will be too conservative. We will stick to our guns and say that the shortfall will be closer to €1.25 billion than €1 billion.

The other strange thing about the Oct returns was the surge in income tax receipts – they overshot by €300 million, bringing the cumulative excess to €240 million. All categories of income tax seem to be doing well and it has been a fairly consistent outperformer all year. No sign here of any significant job losses, au contraire.

On the other hand, corporation tax, which had been doing well, had a weak month – it undershot by €250 million, reducing the cumulative surplus for the ten months to €43 million. Again, much will depend on whether or not this trend continues in Nov when the big payments are made.

On the spending side, things are falling into place, pretty much as the Department said they would. Current spending is €63 million below target – little changed from a month ago – while capital is now only €230 million over target. Two months ago, capital was almost €500 million over. It looks like both current and capital spending will end the year close to target.

The November Exchequer returns will be released on 4 December, just one day before the Budget. It promises to be exciting, both for commentators and the Department alike.