The 2008 Budget will be stiffer than expected due to the emergence in recent weeks of a surprisingly large shortfall in this year's tax receipts. This shortfall will make it much more difficult for Minister for Finance Brian Cowen to deliver any substantive reliefs to taxpayers in next Wednesday's Budget. Paul Tansey, Economics Editor and Stephen Collinsreport
Total tax revenue this year is now projected to fall €1.75 billion short of budgetary expectations due to weak tax receipts during November, according to figures published today by the Government.
The principal cause of the revenue shortfall is a steep decline in stamp duty receipts, reflecting the stalling of activity in the housing sector. Stamp duties are now projected to yield revenues of €3.195 billion in 2007, some €730 million or 18.6 per cent less than was expected at the time of the last Budget.
However, with the exception of income tax, the yields in 2007 from all the other major taxes, including VAT, excise duties and corporation tax, have also been revised downwards by the Department of Finance.
The scale of the shortfall and the speed with which it has emerged add to the difficulties faced by the Minister for Finance in framing the Budget.
In its pre-Budget outlook, published in October, the Department of Finance had forecast that the tax shortfall in 2007 would amount to €925 million this year. Thus, in a matter of weeks, the revenue shortfall has swelled from €925 million to €1.75 billion.
As a result of the revenue shortfall, the exchequer deficit for this year has been revised upwards by more than €1 billion. In the 2007 Budget, exchequer spending - current and capital - was expected to exceed government revenue by €546 million. Now, the exchequer deficit for this year is projected to reach €1.623 billion.
The slowing in tax receipts indicates that the economy is losing momentum. The problem facing Mr Cowen is that a slowing economy also reduces the rate of increase in tax revenues. Thus, Mr Cowen is entering 2008 on a lower tax platform than he had anticipated, while the scope for increases in tax revenues - even at unchanged tax rates - is decidedly limited.
The Receipts and Expenditure White Paper, published today, forecasts that, even with no changes in the tax code, tax revenue will increase by just 3.1 per cent next year. But Mr Cowen has already committed himself to raising day-to-day government spending by 8 per cent in 2008 while he has also announced a 12.5 per cent addition to public capital spending.
With overall public spending set to increase much faster than tax revenues next year, the general government balance is now set to slip into deficit for the first time since 2002.
The Estimates of Receipts and Expenditure showed that the economy was continuing to slow down, with further falls in tax receipts making the Minister for Finance's position for next Wednesday's Budget even tighter than previously revealed by him, Labour's spokeswoman on finance, Joan Burton, said last night.
"What is obvious from these figures is that the Minister is now finally acknowledging and admitting that there will be further flattening of the construction industry," she said. "The Minister must now make clear his priorities for next week's Budget."
Ms Burton added that the slowing down in relation to income tax and VAT indicates that although employment continued to grow, a lot of the new jobs were for part-time workers and workers on low pay who were not generating much in additional tax revenues. "It would have been preferable if the Minister and his department had been more forthcoming before the election on what the figures were really going to be like," she said.