There is a hole in the Government's estimates for tax receipts in the current year. As the economy powers ahead, the Department of Finance got it wrong in estimating the contribution from corporation tax. In the six months to the end of June, the rise in corporation tax came to just half of what had been expected, at 8.3 per cent, rather than 16.4 per cent.
Complaining about a single erroneous estimate may appear petty at a time when the Government's overall revenue surplus is likely to reach 4 per cent of Gross Domestic Product for the year 2000. But, given the penchant of the Department of Finance to underestimate revenue at Budget time, the miscalculation demands serious attention. Officials at the Department yesterday confessed to a shortage of information on the issue, but they cautioned commentators not to get too excited.
Initial indications suggest that the underlying source of the £157 million shortfall was a significant reduction in payments from a number of very large companies, rather than the overall cut in the corporation tax rate from 32 to 28 per cent. If that proves to be the case, the Minister for Finance, Mr McCreevy, may find it necessary to plug a few more tax loopholes in the December Budget to create a more equitable balance between taxes on work and on profits.
In overall terms, the Government will be pleased by the end-June Exchequer returns. In spite of the corporation tax shortfall, revenue exceeded expectations by £650 million, with stamp duties rising by almost 30 per cent, VAT receipts by more than 20 per cent and income tax by 15 per cent. The economy is still expanding at a breakneck pace. But, as constraints grow in some sectors and profiteering emerges, it is now being threatened by rising inflation.
Last week, the Taoiseach, Mr Ahern, estimated inflation could peak at 6.2 per cent before falling back later in the year. The worry is that labour market pressures may intensify as employees seek wage rises to compensate for higher inflation and to allow them to compete in the surging housing market. A sustained loss of competitiveness could result, as wage levels here rise faster than those of our competitors, and the State would become increasingly vulnerable to an external economic shock.
The buoyant Exchequer returns for the past six months were driven by a 44 per cent rise in new car sales. And higher borrowing and consumer spending was reflected in soaring retail sales and rising house prices. At the same time, the economic feel-good factor was massaged by a reduction in income-tax rates, higher salary levels and an increase in the number of people gainfully employed.
The Minister for Finance, Mr McCreevy, advised his Cabinet colleagues yesterday on the parameters of economic and budgetary strategy for the year 2001, in advance of the preparation of Departmental spending estimates for the year. Given the sudden rise in inflation, the Government will have to tread warily. But, in preparing for the December Budget, special consideration will have to be given to the needs of old age pensioners and social welfare recipients. Tax concessions aimed at the low paid, along with improved State services in the areas of health, education and child care must also be priorities.