Business Irish

Saturday 17 November 2018

Impact of bouyant taxes countered by sharper spending increases

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Donal O'Donovan

Donal O'Donovan

State spending in the first seven months of the year outpaced the level of revenues collected by €277m. That compared to a surplus of €3.366bn at the same time last year - although that included the proceeds from the sale of AIB shares.

Stripping out the AIB deal, the Exchequer balance showed an underlying annual decrease of €210m in the period compared to the same point in 2017.

That disimprovement was primarily due to higher spending.

The Governor of the Central Bank warned last week that the Exchequer should be in surplus.

Tax revenues of €29.7m were collected to the end of July, 5.5pc higher than a year earlier.

However, total net voted expenditure to the end of last month was up 8.2pc in year-on-year terms.

"The bigger picture is that buoyant tax revenues are being used to raise spending rapidly rather than to achieve a budget surplus, which the Government does now not expect to achieve until 2020," Davy Stockbrokers economist David McNamara said.

"With external risks growing, hard choices should be made in the upcoming Budget to eliminate the deficit next year."

That echoed the concerns raised by Central Bank Governor Philip Lane last month.

He warned that the State's finances remain vulnerable including because of the high national debt built up during the financial crisis.

Despite a stronger recovery than most of our European peers, Ireland has done less to future-proof the State finances and will be later in moving to a budget surplus, Governor Lane said.

The latest Exchequer figures show tax revenues were ahead of target in July - 0.6pc above the so-called profile for the year.

Income tax is in line with Budget targets and 6.8pc above the figures raised in 2017, although that's not as strong as the decline in unemployment might have predicted, analysts said.

VAT receipts, another good measure of spending in the economy, were up 4.5pc. The latest figures confirm that corporate tax remains the outstanding over-achiever this year in terms of revenue raising.

The take from tax on company profits was up 16pc on the same time last year at the end of July, and 10pc ahead of Budget targets.

Corporation tax receipts have doubled since 2013, noted Peter Vale, a tax partner at Grant Thornton Ireland.

The National Competitiveness Council warned this week that just 10 firms pay 40pc of corporation tax here.

It reflects vast profits booked in Ireland, but has created a vulnerability for the State's finances.

With corporate tax receipts proving unpredictable, Philip Lane called for Government to treat the unexpected levels being paid this year as a one-off windfall - to reduce debt or go to build up an exchequer surplus.

He warned against the alternative course of treating the unexpected tax as income that will recur, and budgeting it into spending increases.

The latest official figures show that caution is not reflected in Government.

The items that feed into the general government balance are now €772m ahead of target, Davy's McNamara said.

Current spending is now €74m above even this year's increased budget and there has been a 7.7pc rise in health spending and a 6.8pc increase in education spending this year, the latest figures show.

Irish Independent

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