THE GOVERNMENT will have to borrow three times more than it had planned and cut spending by €500 million this year because of a projected €3 billion shortfall in tax revenue disclosed in the exchequer returns for the first half of the year.
Spending cuts will be required over the next six months to prevent Government borrowing exceeding the EU guidelines of 3 per cent of GDP for the year. Savings of €500 million will have to be found to fund social welfare payments for an extra 40,000 unemployed due to the downturn.
The official figures published yesterday showed a shortfall of almost €1.5 billion in tax receipts in the first six months of this year, mainly due to a substantial drop in VAT receipts, capital gains tax and stamp duty. Income tax was broadly in line with expectation, as was corporation tax.
The slippage in tax receipts reflects the steep fall-off in economic activity this year. This has caused the Department of Finance to cut sharply its forecast for economic growth during 2008. The department is now projecting an economic growth rate of just 0.5 per cent this year compared to a growth forecast of 3 per cent when the 2008 budget was launched last December.
The steep downward revision in the growth rate is due principally to a major fall in fixed investment during 2008. Triggered by a virtual collapse in construction activity, the department is now forecasting a decline of 15 per cent in fixed investment volumes this year. The scale of this decline, of itself, subtracts four percentage points from this year's rate of economic growth.
However, the department remains optimistic about the prospects of an economic revival in the years ahead. Next year, it anticipates a modest pick-up in the pace of economic activity to 2.25 per cent, while by 2010 a return towards the economy's trend growth rate of 4 per cent is projected.
Details of the cuts or savings will not be decided by the Cabinet until next Tuesday, and Ministers are expected to tell the Dáil next week about the broad shape of their spending plans for the rest of the year.
Minister for Finance Brian Lenihan said last night that the exchequer returns confirmed the trend already established this year of lower than expected tax revenue receipts, due largely to lower growth than projected at Budget time and to a fall-off in tax receipts as a result of weaker property market activity.
"The outlook is for tax revenues to remain weak for the remainder of this year. Consequently a tax shortfall of the order of €3 billion has now been factored into the budgetary arithmetic for this year," said the Minister.
"While the level of economic growth this year is very modest, it must be remembered that the overall level of economic activity remains strong. Output in 2008 will be over 30 per cent higher than in 2002," he added.
He said that overall expenditure was running at 11 per cent ahead of the same period for last year, and there were a number of spending pressures due mainly to higher unemployment. "Such pressures will be addressed within the overall spending targets for 2008 to ensure that a sound exchequer position is maintained. At this stage the general Government deficit for the year could be about 2.75 per cent of GDP," said Mr Lenihan.
He said the Government would take firm action now so as to ensure that the public finances in the years ahead were kept on a sustainable footing. "Sound public finances have been critical to Ireland's success over the last decade and are key to future growth. The Government will be examining a package of measures to be announced to the Dáil following next week's Government meeting," said the Minister.
The Fine Gael deputy leader and finance spokesman, Richard Bruton, said the figures represented the greatest deterioration in the public finances in the history of the State.
"These figures confirm the ESRI's conclusion that the Government blew the boom. Brian Cowen's budgets have destroyed the room for manoeuvre which should now be there to meet the challenges of a recession," said Mr Bruton.
He said the Government was set to preside over a €10 billion deterioration in the exchequer balance since 2006. "The swing from a surplus to a deficit is not due to external factors; it is not due to bad luck. It is down to Brian Cowen's reckless management of the public finances over the last four years," said Mr Bruton.