The Government's room for manoeuvre in the upcoming Budget has been cut substantially, with the latest figures indicating that the Exchequer surplus of tax revenue over spending is likely to be at least £1 billion less than the Minister for Finance forecast at the beginning of the year.
Tax growth has slowed dramatically over the last number of months and at the end of August was only 3.7 per cent ahead of last year, according to statistics released by the Department of Finance yesterday.
In contrast, Government spending is running at 24 per cent more than in 2000, a combination which cannot continue without the Government's finances running into serious problems.
At the end of August the overall Exchequer surplus was running at £2.33 billion, some £1.15 billion lower than the same time last year. The relatively low rate of tax growth is likely to mean that the surplus of revenue over spending will at most register £1.5 billion by the end of the year instead of the £2.5 billion originally predicted, according to Dr Dan McLaughlin, chief economist at Bank of Ireland. And if taxes do not pick up slightly it will be lower than that again.
In June Mr McCreevy cut the target for the surplus at year end to £2 billion, on what the Department then thought was mostly a foot-and-mouth related slowdown in tax revenue. This would assume tax revenue growth of more than 10 per cent. But, according to Dr McLaughlin, this more modest target will be impossible to achieve with only four months to go to the end of the year.
The result will present the Government with hard choices in formulating its pre-election December Budget. If tax was rising at more than 10 per cent, it would be possible to cut taxes and increase spending. However, tax growth of 5 per cent or less means that spending growth will have to be cut back while tax cuts will be harder to achieve.
"These are much the hardest choices this Government has ever had to make," Dr McLaughlin noted.
The real worry is that tax revenue is down almost across the board. The one exception is stamp duties which are running slightly ahead of target, suggesting that house prices are continuing to rise.
The Department of Finance has estimated that income tax will rise by 7.5 per cent but, according to yesterday's figures, it is only up 5.5 per cent. This suggests that either employment growth is lower than the almost 3 per cent estimated recently by the Central Statistics Office or that wage rises are falling back.
Corporation tax was also down in August, although this can be subject to serious timing differences. More crucially, taxes which indicate the extent of consumer spending are also down substantially. VAT is up only 7 per cent against an expected increase of 17 per cent, implying shoppers may have stayed away this summer.
Excise duties are also very weak. The Department had projected them to be 12 per cent higher but they are down by 8 per cent.