Analysis: Buoyant tax revenues to help drive economic recovery

The figures keep getting better. Tax returns have been ahead of target all year, but August was a particularly strong month.

Combined with big savings on the servicing of the national debt – running €400 million below expectations – the strong tax revenues indicate that borrowing this year will come in at less than 2 per cent of GDP, below the spring statement forecast of 2.3 per cent and the target set last October in the Budget of 2.7 per cent.

The exchequer figures are further evidence of economic recovery, adding to other recent indicators, notably the employment data. There is a limited number of up-to-date statistics that give an accurate picture of the economy, but tax revenues are always a useful guide.

Growth indicator

With taxes running 10 per cent ahead of last year and more than 5 per cent ahead of the Budget target level, this is a significant indicator of growth.

While the August figures were supported by some once-off company tax receipts, other tax headings also grew strongly during the month, and signals from income tax, in particular, are positive.

The October figures, showing the key self-employed tax returns, will be interesting, though these will come too late for the budget arithmetic.

Overall spending is below what was expected, though here there are ups and downs.

Health spending in the year to August was almost €300 million ahead of target and the battle over the 2016 budget for this department and its implications will be one to watch. Social protection spending is also ahead of budget – surprisingly given falling unemployment – but elsewhere there are savings, particularly on debt servicing.

Recovery

Politically, the figures allow the Government to play up the economic recovery and its management of the public finances.

The deficit for the year will now be way below what we would have been obliged to deliver under EU rules. It is hard to make a precise forecast, because of issues such as health spending, but Davy stockbrokers were last night predicting a 2015 deficit of under 2 per cent of GDP.

The catch for the government is that EU rules mean that they are limited in drawing up the budget package and cannot use much of the room for manoeuvre created by the strong tax revenues.

EU rules

The EU budget rules, put in place in the wake of the economic crisis, do not allow revenues based on a strong growth performance to be used to fund tax cuts or spending increases that will have an ongoing cost.

Precisely how this will work out will rely on arcane calculations of the budget deficit, adjusted for the state of the economic cycle. In the spring statement, the Government estimated it would have scope to add €1.5 billion to the economy in the budget via higher spending or lower taxes. This figure could rise a bit, but not by too much.

Despite the deficit figures being way ahead of target, the scope to spend more and tax less will still be quite constrained.

It will be a pre-election budget, for sure, but the issue of delivering better public services with roughly the same amount of money will remain.