Government remains in financial straitjacket despite positive data

The upcoming budgetary process may turn out to be the most critical phase of the Coalition’s tenure in office.

Despite renewed pressure from Brussels to hold the line on austerity, it is pretty much accepted in political circles that another tough consolidation could sink the Government, or at the very least prompt Labour to walk.

In a rerun of the build-up to last year's budget, Minister for Finance Michael Noonan has already begun signalling that the planned €2 billion adjustment required to achieve next year's deficit target may not now be necessary.

Just how much he can eat into this €2 billion without crossing swords with Brussels remains to be seen, however .

On the basis of yesterday’s exchequer data, the Government had a surplus of €446 million at the end of May, derived from a combination of higher tax returns and further spending cuts.

Even if this is maintained for the remainder of the year – and that's a big if, not least because of the falloff in employment growth and the stuttering pace of recovery in Europe – the Minister's wriggle room appears extremely limited.

Even the Economic and Social Research Institute, one of the more optimistic commentators, believes the Government will have just €300 million- €400 million available for tax cuts in the budget if the strict deficit targets are to be achieved.

No doubt when the time comes, the Government will offer up some token gesture to hard-pressed middle-income earners, probably a widening of the tax bands, while the real business of austerity, including a further €500 million in water charges, continues on in the background.

The truth is the Government is straitjacketed in terms of its finances for several more years.

Even if the Government's 3 per cent deficit target is achieved next year, under the new EU excessive deficit rules, Ireland will be forced to continue the process of belt- tightening until it reaches a zero per cent deficit.

These are the hard facts of the country’s current fiscal position and a few months of positive tax returns will do nothing to dilute this.

That said, the latest exchequer numbers provide the strongest evidence yet – in exchequer terms – of recovery in the labour market.

Income tax – the biggest tax heading – generated €6.6 billion, 7.8 per cent up on last year and €114 million or 1.8 per cent ahead of profile for the period.

Up to now, the creation of up to 70,000 jobs between the end of 2012 and the end of last year has not been showing up in Government coffers.

Another positive is the better performance of VAT, which generated €5.2 billion, ahead of expectations for the first time this year.

The slow pick-up in consumer spending, linked to the negative trajectory of real income, has been one of the defining features of Ireland’s recovery. It is too early to say, however, if demand on the high street has entered a new phase.

Still it is almost incredible the economy is generating even these modest tax returns given the level of fiscal consolidation and income collapse it has soaked up.