Shortfall in tax revenue threatens spending increases

The Government has received further evidence that its tax revenues are falling short of expectations, with concern mounting in political circles that should the trend continue, expected increases in public spending will come under pressure.

Exchequer returns published on Wednesday confirmed that the underperformance in expected tax revenues which emerged in the first quarter of the year had continued, with revenues coming in 2.4 per cent, or €344 million, below expectations.

The receipts from three – income tax, corporation tax and excise duties – of the big four taxes did not match expectations. Only VAT receipts reached the level projected by the Government.

The Department of Finance has said it is “not at the point where we are worried” about the public finances following disappointing exchequer figures.

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However, the department accepts that if the trends evident in the first third of the year continue next month, there will be implications for budgetary policy.

“But we don’t think the trends will continue,” a spokesman said.

The Government is shortly to begin discussions on public-sector pay, and departments are preparing their bids for spending increases in the October budget.

Targets

The Government published its Stability Programme Update on Wednesday, in which it is obliged by European regulations to set out its fiscal and economic expectations and projections for the rest of the year. Despite the pressure on tax receipts, it did not amend its targets for the year.

However, the Department of Finance has asked the Revenue Commissioners to undertake research into the tax undershoot, and officials from revenue are due to meet finance mandarins in the coming days.

Fianna Fáil finance spokesman Michael McGrath said there was “undoubtedly a worrying trend developing”.

“It’s not a cause for panic, but I’d certainly sound a note of caution,” Mr McGrath said. He said the results for the first quarter of the year “don’t appear to be a blip”.

“The response is to be very cautious in managing the public finances,” he said.

Sinn Féin finance spokesman Pearse Doherty said: “We could be in for a very rough ride here.”

He cited the risks from Brexit and from the tax reform plans of the Trump administration in the US. “This is a worrying signal, and there are serious potential consequences if it continues,” he said.

Employment growth

Finance officials pointed to the strong level of employment growth in the economy, with the State’s jobless rate now at a nine-year low of 6.2 per cent, which was at odds with the weaker income tax trend.

However, income tax, the Government’s main tax revenue stream, undershot the department’s target by 3.1 per cent or €198 million, coming in at €6.2 billion for the four-month period.

The exchequer returns show corporation tax also underperformed the department’s target, coming in 27 per cent below expectations at €587 million. April is not an important month for corporation tax, though May is, and officials will be watching this month’s returns closely to see if there is a recovery in the trend. Officials remain concerned that Ireland’s corporation tax receipts remain so heavily dependent on a relatively small number of big companies.

The below-par performances in income tax and corporation tax, however, were partly offset by stronger VAT returns.

Revenue from the sales tax for the year to date was €4.76 billion, which was €257 million or 5.7 per cent better than expected.

The other main tax head, excise duty, was 6.3 per cent below target at €1.74 billion, which was again linked to the front-loading of receipts on tobacco products ahead of plain-packaging rules.

Expenditure for the year so far was put at €14.2 billion, which was 1.8 per cent below target, but up 4 per cent or €540 million in year-on-year terms.