Saturday, 3 October 2009

Exchequer returns: fairy godmothers desert Lenihan

An Saoi: September has come and gone, and the trees outside my window will shortly be as bare as the State’s coffers. Grey clouds mass from the west and threaten to soak me. But my problems are small – just look at Brian Lenihan’s!

His fairy godmothers have deserted him this month, with Corporation Tax falling far below the €365M expected. This must be particularly worrying as the advance preliminary tax payment for companies with 31st March year-end was due. There must have been a decidedly smaller number of balancing payments made with Corporation Tax returns submitted this month. This may also augur very badly for next month, if there are a lot of repayment claims in their place.

The figures themselves look a little bit better than reality, because the levy on Health Insurers was payable in September. This is a once off payment, which has been included under levies.

This month I would like to take a particular look at VAT, which has slipped further off target, though by slightly less than I had expected. The degree of the problem is perhaps lost as the figures themselves are still so huge. However, let me take you through them, slowly.

It is now over 7% off a target set less than 6 months ago. This target was set knowing the details of two of the six VAT returns due in 2009. If this trend continues the yield will be some €1,000M short of target. The decline in prices may be influencing some of the drop, together with as little stock as possible being retained by anyone.

The September VAT yield is 22% below 2008, 27% below 2007 and around 20% behind the same month 2006. We have now returned to the level of VAT paid in September 2004. Indeed, this is broadly where retail sales index is also.

The smaller taxes are bouncing all over the place, making it hard to forecast where they will end up. However they do not play a major role in funding State spending.

The falling yield from Income Tax shows that job losses continue apace. Income tax in September is 25% below the target. Arrears of income tax must also be building up with many employers not paying over deductions made from employees’ wages and salaries.

Back in July, I set out my own estimate of the outturn, which is below with my update based on the subsequent two months. My expected outturn is now €31,587M, an increase on the July figure but still €2,800M lower than the Minister’s. The end of year figure for 2003 was 32,102, and we are unlikely to beat it in 2009.

The filing of the self-employed returns over the next six weeks could considerably reduce the Income Tax figure, if it throws up a lot of refunds of preliminary tax paid. This may reduce the Income tax figure by a further €200M, as it would have a knock-on to preliminary tax liability. Preliminary taxes paid in 2008 held up reasonably well when compared to 2007, but profits made in 2008 are unlikely to be at 2007 levels in many cases.

Non-payment of taxes looks to me to be as another major component in the decline in tax yield. The Revenue branch of the AHCPS has made this clear to its own union and to other members of Congress that non-payment of declared liabilities is a huge issue. This suggests to me that the underlying state of Irish business is perhaps even worse than is being suggested. A business, which owes more than a few months tax is unlikely to survive.

Further cuts planned by the Government are likely to make the position worse. A gross cut of say €5,000M may reduce the tax yield by €2,500M. However if I am close then the Government starts €2,800M behind where it expected to be.

No comments: