| 20.3°C Dublin

Tightening the fiscal screw

Finance Minister Michael Noonan received mixed signals on the economy yesterday.

The March Exchequer Returns showed that revenue from most of the major taxes was ahead of target for the first three months of the year, while the Fiscal Advisory Council, the independent body set up to advise the Government on budgetary policy, warned that lower-than-expected economic growth would mean that the Government would miss its budget targets.

The Exchequer Returns showed that the Government collected €8.72bn in taxes in the first quarter of 2012, €809m or 10.2pc above the budget day target.

Admittedly the first-quarter tax revenues were boosted by the fact that a large chunk of corporation tax revenues that were due to have been collected in December 2011 were received in January 2011 instead.

However, tax revenue for the month of March was €2.83bn, €153m or 5.7pc ahead of the budget day target. The stronger-than-expected March tax take shows that, even when the effect of the corporation tax timing difference is excluded, underlying tax revenues are still growing strongly.

With the exception of excise duties, all of the main taxes, income tax, VAT and corporation tax came in ahead of the budget day target in March. Perhaps most encouragingly for Mr Noonan, VAT receipts rose by more than 10pc to €1.36bn. So far at least, despite continuing weak retail sales, Mr Noonan's gamble of increasing the standard VAT rate to 23pc seems to be paying off.

Unfortunately for Mr Noonan, the Exchequer Returns were published on the same day that the Fiscal Advisory Council released its latest assessment. In it the Council warned that lower-than-expected economic growth this year for the following three years meant that the Government would struggle to meet its target of reducing the budget deficit to 8.6pc of GDP this year and to under 3pc of GDP by 2015.

In order to keep the public finances on track the council recommended a further €2.8bn of fiscal tightening, on top of the €12.4bn already planned, for the period between now and 2015.

While the council is surely right to warn of the danger lower-than-expected economic growth poses to the Government's budget targets, is its proposed cure even worse than the disease? There comes a time when further tax increases and spending cuts become self-defeating. This is because tax increases and spending cuts reduce economic growth which in turn depresses tax revenues and pushes up spending as unemployment rises.

The end result is that an economy in this situation ends up chasing its tail as fiscal tightening chokes off economic growth which in turn forces even more fiscal tightening. With no sign yet of the lower-than-expected tax revenues being forecast by the Fiscal Advisory Council we suspect that Mr Noonan will be in no hurry to heed its advice to tighten the fiscal screw even further.

Irish Independent