The Exchequer finances are heading into 2004 in a strong position, after final figures showed that borrowing last year was much lower than expected, writes Cliff Taylor, Economics Editor.
They showed a strengthening trend in tax revenue which will benefit the Government this year and which points to a recovery in economic growth.
Exchequer borrowing last year was €980 million, well below the Budget forecast of €1,869 million, according to the final figures for 2003 published yesterday evening. Tax revenues came in €450 million ahead of target, boosted by activity in the property market and by a pick-up in the big revenue areas of VAT, income tax and corporation tax.
Big gains were made in capital gains tax - which benefited from the sale of a large number of investment properties - and in stamp duty, which also benefited from the property market. The Department of Finance warned that some slowdown in property this year may mean that tax returns in these areas are not as buoyant. However, it will be encouraged by a recovery in the main tax areas, with PAYE receipts coming in on target, VAT revenue recovering later in the year and corporation tax well ahead of budget.
The Department is not changing its 2004 budget tax forecasts on the basis of yesterday's figures, but analysts say these estimates now appear conservative and that tax should again beat the budget target provided economic recovery continues.
The late pick-up in revenue last year took even the Department of Finance by surprise. Up to October it was predicting a tax shortfall of €500 million and as recently as Budget day last month it had forecast that borrowing last year would be €1,500 million.
However, the surge in tax revenues combined with savings on the national debt and in our contributions to the EU budget to bring borrowing in well below target. It represents a turnaround from earlier last year when weak tax trends led forecasters to predict a substantial borrowing overrun for 2003.
The Department has yet to calculate a final figure for general government borrowing - the EU borrowing measure which excludes payments to the National Pension Reserve Fund. However, it estimates that under this heading borrowing was just 0.1 per cent of Gross Domestic Product last year, well below the 0.7 per cent Budget target and contrasting with France and Germany, where borrowing has gone through the 3 per cent ceiling.
The main area of weakness in the tax figures was excise duties, which rose by 3 per cent against a target of 8.3 per cent. These were hit by falling sales of tobacco and spirits in particular. Department of Finance officials pointed out at yesterday's briefing that production of cigarettes for the Irish market fell 10 per cent last year, while spirits imports were down by almost a quarter.
Although taxes were ahead of target, the figures show that voted Government spending - the money spent on providing services and investing in infrastructure - came in remarkably close to target. A small €126 million overshoot in day-to-day spending was offset by under-spending of €140 million on investment projects. The figures show that large amounts were spent on investment late in the year as spending in this area was well below budget for much of the year.
While borrowing was lower than expected, the figures do show the first deficit since 1997 and borrowing is expected to rise again this year, with a Budget target of €2.8 billion for Exchequer borrowing. The Minister, Mr McCreevy, said that given the scale of borrowing projected for the next three years - €10 billion - there is a need for continued spending restraint.
However the Labour spokesman, Mr Brendan Howlin, said the Exchequer figures are part of a "game-playing" process, with dire predictions at the beginning of the year and a dramatic improvement towards year end. "Far from congratulation, in any other walk of life this kind of miscalculation would be grounds for dismissal," he said, accusing the Minister of "talking down" the budgetary situation to justify cuts in services.
For Fine Gael, Mr Richard Bruton welcomed the improvement in finances but added that the public still has a right to be concerned about the economy, particularly in the light of the massive spending increases before the last election.