ANALYSIS:Slight GDP growth and stabilisation of the jobless rate could offset the €2bn tax shortfall, writes JIM O'LEARY

WITH JUST three months of the year left, uncertainty about the 2009 budgetary outcome is diminishing. It now seems certain that the target for the budget deficit announced in April will be overshot by an appreciable margin.

The Department of Finance now expect this year’s deficit to amount to 12 per cent of GDP. This compares with the 10.75 per cent of GDP projected in April and the quaintly anachronistic 6.5 per cent of GDP target that featured in the original 2009 Budget last October.

The reason for the overshoot relates to tax. At end-September, tax receipts were running almost €1 billion below the official forecast. For the first nine months of the year, total tax revenue was some 17 per cent below the corresponding period of 2008.

More tellingly, excluding corporation tax (CT), where the time profile of receipts has been radically altered by a new payments schedule, the fall was 20 per cent. This latter figure compares with a 14 per cent decline in non-CT receipts projected in April. It is now clear that this gap will not be bridged before year-end, nor will it be made good by an outperformance on the part of CT receipts.

The department now projects a €2 billion tax shortfall for the full year, in line with my own long- held judgement, but still capable of proving too optimistic.

On the spending side, the news is better. At end-September, total voted government spending was €500 million (1.5 per cent) within budget, with capital expenditure accounting for the bulk of this. Whether the end-of-year position will be similar is an open question.

On the one hand, spending on unemployment-related payments will be substantially less than budgeted. An average monthly live register count of 440,000 was projected at budget time; it now seems possible that the actual average will be just over 400,000.

The resultant savings could amount to about €500 million. On the other hand, it looks like there will be spending overruns elsewhere, including within the social welfare budget.

Capital taxes remain chronically weak (they will generate €700-800 million for the full year, a vertiginous fall from the €3.5 billion garnered in 2007).

Stamp duties, unaccountably, yielded €240 million in September, 140 per cent more than in the same month of last year and greatly in excess of the €40-70 million range that typified the previous eight months. Perhaps, unnoticed by all observers, activity in the housing market has started to surge again.

Excise and VAT receipts were notably weak in the month, the former down 28 per cent and the latter down 20 per cent on September 2008.

Income tax receipts in the month were down 23 per cent on a year earlier, far and away the steepest fall recorded in any month since the downturn began.

Yesterday’s revised department projections will presumably provide the 2009 baseline for the 2010 budget. All other things being equal, the latest official projections of this year’s out-turn would make for a tougher December budget, given the targets for next year already set out last April (the bottom line being a budget deficit of 10.75 per cent of GDP).

For example, a tax take this year €2 billion lower than previously forecast would imply, all other things being equal, that next year’s projected tax take would be some €2 billion lower than previously expected.

This in turn would mean having to identify a net €2 billion worth of adjustment measures over and above those already signalled for 2010 – a really forbidding, if not insuperable challenge.

However, all other things will not be equal. When it outlined its medium-term fiscal strategy last April, the department was forecasting another significant contraction in the economy in 2010, with GDP declining by almost 3 per cent and unemployment rising to an annual average rate of 15.5 per cent.

If the latest reading of the runes by Ireland’s stockbroker economists is close to the mark, the GDP growth rate may be marginally positive next year and the unemployment rate may stabilise around its current level of 12.5 per cent. This would be more than enough to offset the effect of this year’s tax shortfall.