TAX REVENUES fell 10 per cent, or €430 million, short of official expectations in May as the deterioration in the public finances worsened. As a result, tax receipts in the first five months of the year are almost €1.2 billion or 6.4 per cent below budgeted levels, according to Exchequer Returns published yesterday.
Most of the tax shortfall during May was due to a steep decline in VAT receipts. VAT is the single largest source of Government tax revenue. Last month it yielded €314 million less than expected. In the five months to May, VAT receipts have fallen €591 million or 8.1 per cent below budget.
Construction-related taxes have been very weak since early in the year, reflecting the stalling of activity in the building sector. In the five months to May, Capital Gains Tax (CGT) yielded €360 million or 37.4 per cent less than expected. Similarly, receipts from stamp duties fell €129 million or 13.8 per cent behind budget in the same period. Taken together, these three taxes account for more than 90 per cent of the shortfall in exchequer tax revenue in the first five months of the year.
The only ray of light on the Government's tax horizon is the performance of income tax. In the five months to May, income tax brought in €32 million more than expected. This suggests that declining activity levels have yet to be mirrored in the numbers at work.
The yield from Corporation Tax is also broadly in line with expectations.
Within the Department of Finance it is now accepted that the near-€1.2 billion tax shortfall to date in 2008 is irrecoverable; it cannot be made good in the remainder of the year.
As a result, tax targets for the year are likely to be recast following publication of the half-yearly Exchequer Returns in early July.
However, this exercise will not amount to a "mini-budget" and is not expected to involve adjustments to Government spending. So far this year current Government spending is slightly below target.
The reverses suffered by the exchequer on the tax front this year have been severe. It is now almost certain that the Government will bring in less tax revenue this year than was the case in 2007. In the first five months of this year the Government collected almost €1.5 billion or 8 per cent less in total taxes than in the corresponding period of 2007.
The scale of the tax shortfall thus far in 2008 has derailed the Government's deficit plans. In this year's Budget the General Government Deficit was targeted at €1.845 billion or 0.9 per cent of Gross Domestic Product (GDP).
Even with no further deterioration in expected tax receipts, the €1.166 billion tax shortfall suffered so far would raise the Government deficit to more than €3 billion, equivalent to 1.5 per cent of GDP. The EU Stability and Growth Pact limit on budget deficits is set at 3 per cent.
The precipitate fall in VAT revenues last month testifies to the fact that the weakness in the construction sector has now spilled over into consumer spending, the largest component of domestic demand.
The Organisation for Economic Co-Operation and Development (OECD) yesterday forecast that the volume of spending in the domestic economy would fall this year.
The Paris-based think-tank predicted that the quantum of home demand would decline by 0.2 per cent in 2008, calling time on the long-running domestic boom.
Despite the slippage in domestic demand, the OECD still forecasts that the economy will grow this year, driven ahead by the expansion of net exports.
Overall, the OECD expects that real Gross Domestic Product (GDP) will advance by 1.5 per cent in 2008, with growth accelerating to 3.3 per cent next year "as the housing construction cycle bottoms out".