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Government will have to make the hard choices

The year is just five days old and already there are clear indications that the Government will struggle to meet its 2012 budgetary targets. The 2011 Exchequer Returns, which were published yesterday, show that tax revenues were €873m below target last year while the VAT take was almost €470m off target.

It was only the 22pc jump in income tax receipts, driven largely by the introduction of the universal social charge at the start of 2011, that kept the public finances more or less on track last year. The €2.5bn increase in the income tax take, the equivalent of almost €1,400 for each of the 1.8 million people still working in this country, was clearly a once-off and cannot be repeated this year.

The centrepiece of the Government's 2012 Budget was the 2pc increase in the standard VAT rate to 23pc. The Government hopes to raise an extra €670m from the VAT increase this year, almost two-thirds of the €1.1bn of extra tax revenue which the Government has pencilled in for 2012.

Even before the publication of the full-year Exchequer Returns, that looked like a stretch. With consumer spending having fallen by almost a quarter since 2007, the notion that increasing the VAT rate so substantially would somehow persuade nervous consumers to start spending again always appeared fanciful. The 2011 Exchequer Returns would appear to confirm the fears of those who believed that a substantial VAT increase, by inflicting yet another blow on already traumatised consumers, would serve as a further incentive for shoppers to keep their hands in their pockets.

If, or more likely when, the Exchequer Returns for the early months of 2012 confirm that the VAT increase has proved to be counter-productive and that the hoped-for revenue boost has failed to materialise, the Government will be forced to either impose new taxes and/or cut public spending in order to deliver on the €3.8bn 2012 target agreed with the EU/ECB/IMF "troika". In other words, we could find ourselves at the receiving end of a second, "emergency" Budget sometime around mid-year.

In last month's Budget, the Government attempted to square the political circle of adhering to Fine Gael's general election promise of no income tax increases while at the same time appeasing Labour's trade union paymasters by sticking to the terms of the Croke Park agreement and not cutting headline social welfare rates. The VAT increase, by putting off the need for such hard choices, seemed to allow both sides to have their way.

Even at the time this looked like an impossible balancing act and that sooner or later both government parties would have to agree to measures that went against their most dearly-held principles.

Yesterday's Exchequer Returns make it clear that this Government is going to have to make some very hard choices well before end the end of 2012.

Irish Independent