There is a rather worrying sentence on page C.32 of the 2002 Budget booklet. It reads: "Budget 2001 used the SWITCH model developed by the ESRI as an aid to some of the assessment of its impact. It was not possible to use the model again this year as ongoing technical work in specifying the parameters of the model was not concluded in advance of the Budget." SWITCH stands for Simulating Social Welfare and Income Tax Changes and is a computer model which simulates the effects of changes to the tax and soc

What is interesting about this you might ask? The answer is contained in the Exchequer returns for the five months to the end of May. They reveal that income tax receipts are now running some 14.75 per cent behind the same period last year. The Department's estimate of a modest 1.1 per cent increase for the year as a whole looks quite fanciful as it would require a massive surge in the second half of the year. More importantly, it means the Exchequer finances are in a mess.

It is reasonable to ask if something has gone horribly wrong with the Budget day arithmetic on the basis of the shortfall alone. Suspicions can only be heightened by revelations such as those on page C.32. The nightmare scenario that is now being contemplated is that the Department miscalculated the impact of the tax cuts in Budget 2002 and as a result the tax base has been eroded to a point that it is incapable of sustaining the Exchequer at prevailing levels of economic growth.

Perhaps the strongest evidence that the Government has overdone things on the tax cut front, is that the income tax take is falling even though both the number of people at work is increasing and average wages are rising. The latest labour force survey -- which was published at the end of last month - showed that the number of people in work rose by 36,000 in the three months to the end of February. Average earnings are estimated to have risen 10 per cent in the 12 months to the end of April.

There is ample other evidence that the economy is growing, some of it contained in the Exchequer figures themselves. The revenue from consumption taxes, such as VAT and excise duties, are either on target or ahead of target during the year to date.

The Department has been reluctant to get into any debate about the accuracy of its figures and has not made any public comment on the shortfall. Privately officials point out that the deficit in income tax receipts is most likely the product of comparing five months of strong economic growth at the start of 2001, with five month of sluggish growth in 2002. They predict the situation will be the reverse in the second half and are keeping faith with their forecast of a 1.1 per cent increase overall.

THERE have been a number of other technical explanations advanced for the shortfall, all of which are plausible. They include the fact that 2002 is a unique year because the start of the tax year was moved back from April to January. This means that for the first part of the year there was something of a "double whammy" as far as the impact on the Exchequer of the 2001 and 2002 tax cuts was concerned.

Another explanation gets neatly around the problem of income tax returns falling, while the numbers at work are rising and salaries are growing. The argument is that companies are paying smaller bonuses and offering less overtime in order to avoid having to lay off workers. As a result the national wage bill shrinks, reducing income tax revenues, even though the number at work and the average wage are rising.

It is a neat theory but given that the effect would have to be very widespread to explain the sort of revenue shortfall we are seeing, one would also expect to see a lot of anecdotal evidence supporting it. And we have not.

But even if you subscribe to all these theories and a couple of other ones that are floating around you still would be hard put to explain the shortfall in income tax that is currently manifesting itself.

It seems increasingly plausible that there is a problem with the Department's projections. Needless to say Merrion Street is not blind to this issue and has been reviewing its calculations on a regular basis.

It has also looked to see if there might be some flaws in the data - provided to it by the Revenue Commissioners - on who pays tax and at what rates, which form the basis of its calculations. So far they have not found any holes, but the review is ongoing.

It is certainly too early to say one way or another if there is a problem. As far as this year goes it is a somewhat academic question. Raising taxes is not an option and it appears that buoyancy in excise duties and VAT will ride to the Exchequer's rescue to a certain extent.

Overall revenues for the first five months are only down 1 per cent on the same period last year. If there is further buoyancy in areas such as corporation tax, it is possible that total tax revenues may not undershoot the 8.6 per cent increase that is forecast, by too much.

On the bright side, the Government might find it has already met its commitment in the new Programme for Government to take all minimum wage earners out of the tax net and ensure that 80 per cent of earners pay tax only at the standard rate.

The real problem for the Department is that people are now seriously questioning its figures and by extension the strength of its grasp of the economy. It is an issue that must be addressed and an independent audit might go some way to resolving the issue.

It is vital that the projections on income tax made in Budget 2002 and its successors are based on valid projections. An administration planning to run deficits pushing up against the maximum allowed by Brussels for the next few years cannot afford to get its sums wrong.