Tax returns for the first half of the year show the Government is well on course to exceed its own revised forecasts. The spring statement in April said receipts would come in €1 billion ahead of the budget day target, but returns to June are already €800 million above profile.
This, together with lower spending, will have a bearing on key fiscal metrics. The April forecast was predicated on a budget deficit amounting to 2.3 per cent of economic output, well down from the original 2.8 per cent target. Still, Davy economist Conall Mac Coille said a deficit close to 1.3 per cent of GDP may well be in play if the first-half out-performance is repeated in the second.
It is long-established official practice to under-promise and over-deliver on the fiscal front. At this point , however, it is clear that more cash is coming in than targets would suggest. While there has been criticism of the plan to cut income tax, it looks like the Government will have scope to do just that and simultaneously beat its deficit targets. This is in the nature of an exercise to keep everyone sweet.
All of that assumes that economic growth proceeds apace and that the ructions in Greece will not disrupt Ireland’s recovery. Although lower borrowing costs delivered a clear benefit to the public finances in the first half the year, the most immediate risk to the State in the “Grexit” scenario would be an increase in bond yields. At this stage in the drama, however, it’s impossible to predict the outcome of events in Athens.
The exchequer figures, published last evening, show tax receipts between January and June came in ahead of €20 billion for the first time since the same period in 2007. This was just before the credit crunch in global financial markets, which provided a grim foretaste of the economic devastation to come.
As such, a rough comparison between the 2015 and 2007 returns provides a vivid illustration of how the tax system was reconfigured in the long and difficult campaign to repair and reinforce the public finances.
Over-reliance
Recall first that the period before the crash was characterised by over-reliance on transaction-based taxes such as stamp duty, which are highly prone to the winds of economic change.
It was workers who shouldered the burden of recovery through increases in income tax. While the PAYE system provides an efficient collection point, a big decline in employment will always erode returns if steps are not taken to extract more income tax from people who remain at work. When crisis struck Ireland, the extraction was done via the universal social charge.
The figures tell their own tale. The State collected €20.81 billion in tax in the first half of 2007. The income tax take, at a time when unemployment was at 4.7 per cent, was €5.97 billion. Now consider the same period in 2015, in which the State collected €20.62 billion in tax. Unemployment is well down now from the crisis peak but, at 9.7 per cent in June, it is still a great deal higher than in 2007. In the first six months of 2015, however, income tax receipts reached €8.3 billion.
The €2.3 billion increase between 2007 and 2015 amounts to a heavy additional burden on a cohort of workers that is still smaller than before crisis struck. With a general election on the way, this helps explain the Government’s political push to cut income tax.
There is more. Stamp duty returns stood at €430 million in the first of half of 2015, less than one-third of the €1.7 billion collected in 2007. A review of the figures also shows that VAT returns reached €7.28 billion in the first half of 2007, when consumers were still spending with gusto. In the first half this year VAT receipts came in just below €6 billion.
The figure is up a good deal from the €5.1 billion nadir reached in the first half of 2011, just after Ireland entered the EU/IMF bailout programme. However, consumer spending is still well behind the pre-crash times. With fewer people at work overall and workers paying more income tax and other tax than before crash, that tells its own story.
