As most forecasters agree, this year is likely to be the last in which a set of exceptional factors conspire to produce a rate of economic growth that remains, by most standards, extraordinary. Yesterday's exchequer returns were also the last before polling day on May 24th. As such they demonstrate how important it will be for growth in the economy and, by extension, in tax revenues to reach projected targets if the many promises being made as part of the election campaign have any chance of being kept.
The Department of Finance confirmed yesterday that tax revenues grew by 10.8 per cent in year to April. That this rate exceeds Government expectations for the period of 10 per cent reflects the fact that the full impact of the torpor in the property market has yet to be felt. It also reflects an exceptional and probably once-off windfall in corporation tax receipts. That windfall is related to the strong influence of timing factors on the monthly profile of corporation tax receipts. Furthermore, corporation tax receipts do not tell us how strong the economy is now but how strong it was six months ago.
The economy is in the process of slowing from rates of growth that many commentators regard as artificially high. The Economic and Social Research Institute (ESRI), Davy stockbrokers and AIB have all predicted in recent weeks that the growth rate will decline next year to below 4 per cent for the first time since 1993. Growth rates of between 3 and 4 per cent are no disgrace and are still significantly above the euro zone average. But they are well below the assumed rates on which most political parties have based their election promises.
Based on an anticipated average annual real growth rate of 4.5 per cent between 2008 and 2012, most parties assume tax revenues will, on average, grow by 7.7 per cent over the same period. The 10.8 per cent growth in tax revenues in yesterday's figures is slightly above target for the first four months - a target that underpins an 8 per cent projection for 2007 as a whole.
With the economy set to grow by more than 5 per cent this year, an obvious question presents itself: if tax revenues are growing by 8 per cent in a year when the real economy is growing by more than 5 per cent, how can tax revenues possibly grow by 7.7 per cent if and when - as leading experts predict - economic growth falls below 4 per cent?
These fractional magnitudes in annual growth rates understate their huge significance. Over a five year period, any shortfalls in tax revenue growth, even of the magnitude of a percentage point a year, could produce a hole of several billions of euro in the exchequer finances by 2012. If so, strong and ever present pressure to increase public spending means that tax promises and not spending promises are likely to take the hit. Especially given that like this Government, its successor will delay tax cuts until close to the next election, after most of the money has already been spent.