THREE MONTHS after the Minister for Finance presented his budget, the question is: should the Government adjust its spending and revenue targets?
The Taoiseach has rejected the idea, saying a review now would be premature. Nevertheless, the exchequer returns for February highlight a worrying trend, with spending rising rapidly and tax revenues falling sharply. Receipts for January and February, which were 8 per cent lower than last year, fell €516 million below the tax target set for the first two months of this year. The revenue shortfall largely reflects a lower than anticipated yield from capital and indirect taxes. A reduction in capital gains tax and stamp duty receipts suggests the Department of Finance has underestimated the impact of a weaker economy and a declining housing market.
Two months into the financial year, it may well be premature to reach definitive conclusions about what are disappointing revenue figures. Amber lights, however, should be flashing. For the spending and revenue figures must raise concerns that a higher than planned exchequer deficit may materialise by year end. Certainly these figures renew doubts about the Department of Finance's skill in forecasting revenue receipts, not just this year, but over the past decade. The department's record has been unimpressive. Comptroller and Auditor General John Purcell told the Dáil's Public Accounts Committee last month that he had asked the department to explain its revenue forecasting performance between 2004 and 2006.
In 2004, tax revenue outstripped the department's estimate by €2.2 billion or 6.5 per cent. In 2005, the underestimate of revenue was €1.7 billion. And in 2006, the department's forecasters were €3.9 billion off target. In three years, the department underestimated tax revenue by nearly €8 billion. Last year the department changed course and adopted a less cautious forecasting approach, but with no more success. This time, it overestimated tax revenue by €1.8 billion. And the department has just made a poor start to this financial year. The variations in the department's forecasting performance have ranged from overestimating revenue by 9 per cent in 2006 to underestimating it by 4 per cent in 2007. Forecasting government spending and revenue is more an art than an economic science, but such large variations in revenue estimates are well outside a tolerable margin of error.
Three years ago the International Monetary Fund, in its analysis of the economy, noted that underestimation of tax revenues had been a feature of the department's performance for more than a decade. Since the IMF review in 2005, the department's performance has got worse, not better, despite various attempts to improve it. In 2002, an informal departmental group was set up to examine how this might be done. It is still sitting. Another review group, which was set up in 2006, has just reported and offered some new solutions. One can only hope for a major improvement in the department's forecasting performance, given that budget deficits, not budget surpluses, are the bleak new economic reality.