Government’s revenue projections back on track following tax overshoot in April
Following two consecutive months of undershoot, tax revenues in April came in ahead of the Department of Finance’s estimated monthly outturn. At Eur1.77 billion, receipts in the month were some Eur260 million or 17% ahead of plan. While it is important to point out that April is one of the smaller months of the year in terms of tax intake, the result of the overshoot is that the cumulative position for the year-to-date is now essentially back in line with the Department’s target.
In terms of the detail in the month, two categories of tax revenue, namely corporation tax and VAT, drove the better performance. Having come in below plan in the preceding two months, corporation taxes were ahead to the tune of Eur133 million in April. VAT receipts came in some Eur77 million ahead in the month, albeit that it should be noted that April is not an important VAT collection month.
Budget 2010 forecast tax revenue for this year at €31.05 billion, some 6% behind the 2009 outturn of €33.04 billion. In the year to April, receipts were down some 10.8% compared with the corresponding period in 2009, a notable improvement on the 15% annual rate of decline in March. Base effects are likely to be supportive of a further easing in the annual pace of decline of tax receipts in coming months. In addition, a less weak economic environment than that envisaged by the government at Budget time may contribute to a more modest drop in tax revenue in 2010.
The Budget was framed on the basis of a 1.2% contraction in GDP this year, compared with our own estimate of -0.5%. We take encouragement from these latest tax revenue figures, as well as from the mounting evidence that the economy is on the road to recovery. So while 70% of the annual intake is still due, we remain of the view that tax receipts may well end up falling by less than the 6% factored into the Minister’s Budget forecast.
Further clear evidence of spending restraint, especially outside of social welfare
Turning to the spending position, the April numbers provided further confirmation of the sharp retrenchment in discretionary expenditure. Total net voted spending is running 8.1% below 2009 levels, a pattern that has resulted in a reduction of Eur1.3 billion compared to the first four months of last year.
As with previous months, the capital side is leading the decline in percentage terms and is down 26% in the year to April. We also note that the capital spending programme is continuing to run some way (14.6%) behind profile, though this shortfall relative to plan may well be made up later in the year.
But what has perhaps been most striking about early-year spending patterns has been the notable pull-back in net current spending. This is running 5.7% below year-ago levels, yielding savings of Eur783million so far in 2010.
However, even this masks the true correction which is taking place in core spending. We define this as spending minus that undertaken by the Department of Social & Family Affairs (SFA) which is heavily influenced by the considerable additional burden of the rising numbers now availing of social welfare benefits. This latter factor is evident in the SFA spend which at Eur3.5billion is 12% higher than 2009 levels (despite the cuts in benefit rates announced in the December Budget), though even this is running some 2% lower than expected.
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But, significantly, spending outside of SFA is running 11% lower than the corresponding period last year. This follows a full-year decline of almost 6% in this area of spending in 2009, thus providing clear evidence of a pronounced pull-back in discretionary spending. This is a very welcome aspect of the Irish fiscal correction, as the greater the share of the total correction that can be achieved on the current spending side, the lower will be the need for any further increases in taxation.
Ireland is a “credible deficit reducer”, but Greek crisis highlights the critical importance of continuing to hit fiscal targets
The Irish government has made very important progress over the past two years in tackling the extremely large budget deficit here. Indeed, it is worth recalling explicitly that Ireland’s programme of fiscal correction commenced in July 2008. This took the form of an initial package of spending adjustments which has since been followed by a total of three Budgets (in October ’08, April ‘09 and December ’09) as well as a further package of spending cutbacks in February ’09 which included the introduction of the public sector pension levy. In total, the cumulative impact of these measures on the budgetary situation in 2009 is estimated at some Eur8 billion, equivalent to 4.7% of GDP – a substantial adjustment effort by any standards.
Through such determined efforts over the past two years, the Government has built up a track record for itself as a “credible deficit reducer” in the eyes of the international investment community. This has certainly helped Ireland to differentiate herself from other high-deficit countries that have yet to get serious on tackling their outsized budget gaps. Up until about a month ago that was being reflected in a steady drop in Ireland’s borrowing costs both in absolute and relative terms.
However, the serious escalation of the public finance crisis in Greece in the past four weeks in particular has begun to impact on conditions in other periphery bond markets including Ireland’s. At today’s European market close, the spread on Irish 10-year bonds relative to those in Germany had risen to 2.7% - their highest level since March 2009 and within a handful of basis points of the record levels of about 2.85% seen around St Patrick’s day of last year. In absolute terms, 10-year borrowing costs facing the Irish state now stand at almost 5.6%, up a full 1% in the past two weeks alone.
Today’s April Exchequer returns contained an encouraging combination of an improvement in tax revenues as well as further clear evidence of spending restraint. This leaves the net position pretty much in line with the Minister’s targets for the year as a whole.
However, the uncomfortable fact remains that Ireland’s deficit is still very high and that it is now more important than ever that the Government continues to hit its fiscal targets to ensure that contagion from the Greek crisis is minimised.
Simon Barry,
Chief Economist, Republic of Ireland,
Ulster Bank Capital Markets,
3rd Floor,
Ulster Bank Group Centre,
George's Quay,
Dublin 2.
Tel: +353 1 6431553
Mob: +353 86 3410142
Email: simon.barry@ulsterbankcm.com
Website: www.ulsterbankcapitalmarkets.com
Lynsey Clemenger,
Economist, Republic of Ireland,
Ulster Bank Capital Markets,
3rd Floor,
Ulster Bank Group Centre,
George's Quay,
Dublin 2.
Tel: +353 1 6431565
Email: lynsey.clemenger@ulsterbankcm.com
Website: www.ulsterbankcapitalmarkets.com
