ANALYSIS:FOUR MONTHS into the year, the April tax returns were effectively on target, a significant improvement on the position a month ago when there was a €266 million shortfall.

This was the best outcome in a long time; the cumulative tax position has been in significant shortfall pretty much continuously since May 2009.

It reflects a combination of things. First, this year’s targets are less demanding, reflecting the weaker economy forecast in the budget. This shows up in the comparison with the first four months of 2009 when the tax take was almost €1.1 billion higher (see table). Second, it reflects a stabilisation of the economy, albeit at low levels.

The Department of Finance has been much criticised in recent times, and quite unfairly too, for its failure to forecast tax shortfalls. It is entitled to one cheer in respect of the latest numbers. As the International Monetary Fund (IMF) said recently in another context, we have turned the corner even if we are not out of the woods yet.

Indeed, this bit of good cheer was added to yesterday by the European Commission, which produced a set of forecasts for Ireland that were considerably more optimistic than the recent IMF ones. The commission opened its section on Ireland as follows: “The global economic and financial crisis aggravated what started as a homegrown downturn and turned it into a protracted recession.”

The commission did not go so far as to say that there would have been a soft landing in the absence of the global recession but its assessment is more balanced than the usual type of thing that passes for analysis.

The NCB PMI index was also published yesterday. It indicated that, after more than two years of decline, the important services sector is back at break-even. All in all, it appears that the economy at this stage is performing broadly in line with the trajectory set out in the December budget.

This is important when the eyes of the world are on Ireland – the first of the euro peripheral countries to tackle the deficit, and voluntarily at that. It is helpful that, with one-third of the year gone, the fiscal strategy is on track with no need of another supplementary budget. One of the worries regarding Greece is over its ability to deliver the spending cuts and tax hikes.

The other main feature of yesterday’s returns was continued spending shortfalls. The undershooting in current and capital spending and also in debt interest all grew further in April.

Current voted spending is now €183 million, or 1.4 per cent, behind target. This seemingly reflects underspending on a range of social welfare programmes, another indication that parts of the economy are performing better than expected.

Voted capital spending is €234 million, or 10.6 per cent behind target. Much of this may reflect timing factors but, clearly, there is a reasonable prospect of some undershoot at year’s end. This increases the chances of this year’s budget coming in on target even if tax revenues were to disappoint later in the year.

The story as regards debt interest is similar, where the cumulative saving is now €135 million. However, the outcome will depend on the cost of funding and the amounts raised over the remainder of the year. The recent blowout of spreads in Irish and other peripheral country spreads is not helpful.

It would be wrong to get carried away by the latest developments. With eight months left, there is still a considerable mountain to be climbed. For example, at the end of April, tax revenue was down 10.8 per cent on last year. The budget target is that this will ease to 6 per cent by next December.

The April tax receipts were also flattered by corporation tax, which came in €133 million ahead of target. This can be distorted by large payments, which are frequently once-off. Company tax receipts are probably benefiting from the significant multinational activity and exports last year.

It might, thus, be premature to conclude that this is a genuine reflection of underlying activity in the domestic economy.

Though income tax performed better in both March and April, it is still €87 million, 2.5 per cent behind profile for the four months. This is probably a more accurate reflection of the true situation where wages and employment are concerned.

Given that taxes are paid at least a month in arrears, the April returns give us a fairly good picture of activity in the period December to March. This also irons out any wrinkles associated with the bad weather in late December/early January.

While it looks like the economy may have bottomed out in the first quarter, it would be premature to say that the tax data signals a return to growth just yet.