Tuesday, 5 January 2010

Exchequer figures: turning a corner or heading into a cul-de-sac?

An Saoi: Well, the end of year Exchequer Figures have arrived and are far better, or should I say are less worse, than was expected. The figures are well below those projected in April, yet curiously €500M above the projection made much more recently in the pre-budget White Paper. The total is above my own projections, which leaves me with a degree of egg on my face.

As I pointed out in my commentary on the November figures, VAT remains particularly weak, some 6.6% below the April target. Income Tax also continues to weaken further. As this weakness has continued into December, I presume that the PAYE returns must be particularly poor, reflecting the continued trend in falling employment numbers and pay reductions. It is hard to see any improvement from either source in 2010, despite suggestions of a pick-up in sentiment towards the middle of the year. My own figures, while slightly below the outturn, were respectable.

Holding two Budgets annually clearly is good for Excise returns, and it is here my I met my Waterloo. Premature withdrawal of product from bond by wholesalers presuming budget increases backfired on them and on me, but artificially increased payments to the State. There is likely to be a reversal in the first few months of 2010, unless of course there is a boom in car sales as VRT is accounted for under this heading.

The last minute flurry of Capital Gains Tax took me, and the Deptartment of Finance, by surprise. The final outcome is nearly 40% over their White Paper figure. I am as surprised as they are, and have been wracking my brains for the disposal(s) which could explain the yield.

Corporation Tax figures are also respectable, and as I noted in last month’s commentary all the more so considering the number and amounts of repayments. I hesitate to use the term fairy godmothers again - however there is someone out there with a US twang looking after the Department of Finance.

In relation to CAT, I slightly over-estimated the yield but was considerably below the Stamp Duty outturn, but then again so did the Department of Finance in the White Paper. It has come in almost at the original April estimate. Could the forthcoming introduction of E-Stamping by the Revenue Commissioners perhaps have forced many solicitors to bring their affairs up to date? Customs Duties are 9% below the April target, and continue to reflect weak consumer spending and a lack of investment in capital goods sourced from outside the EU.

Conclusion: The tax figures and other recent reports from the CSO confirm our total dependence on multi-nationals and the Public Sector, both commercial and otherwise, for employment and taxes. The private indigenous sector continues to perform poorly. The need to repair personal balance sheets, and in particular to clear at least some of their personal debts, is going to leave the public circumspect in their spending habits. Public Servants in particular are receiving their first payslips of the year this week, and are unlikely to be rushing out to spend, knowing that further pay cuts are likely. The only road-sign visible indicates a cul-de-sac rather than a corner.


Joseph said...

"The total is above my own projections, which leaves me with a degree of egg on my face."

I wouldn't beat yourself up about that.

The fact remains that what we spend versus what we actually have to spend are poles apart and we would have to beggar the country in terms of tax hikes and spending cuts to get them anywhere near each other. How are we going to square that little round hole? We can't keep borrowing forever that's for sure.

Michael Burke said...

A very useful post, An Saoi.

Just two points to add. It is vital to identify the source of the deficit problem in order to address it, which the DoF has failed to do. In 2007 tax receipts were €48.9bn. The following year these receipts fell €8.1bn, while the Exchequer Borrowing Requirement was €12.7bn higher. That is, the overwhelming bulk of the rising deficit is caused by lower tax receipts, not increased spending. The pattern was repeated in 2009, with tax receipts €15.9bn lower than 2007, and the EBR overshooting by €24bn. If the overwhelming bulk of the deficit shortfall is created by plunging tax receipts it is pointless, and counter-productive to attempt to close the deficit by spending cuts. A resurgence in tax receipts is required, and can only come about from a revival in activity.

Second, the collapse of indigenous businesses and the employment that goes with them is a function of the government's unique contractionary experiment, supported by IBEC. It is a policy which leaves the MNCs largely unscathed. The campaign to lower private sector wages would only accelerate corporate insolvencies. At the same time, IBEC offers conditional support to NAMA even as its members are choked off from credit. It is incapable of championing the preservation of Irish business, so that duty falls to others.

An Saoi said...

Joseph & Michael,

Thank you for your posts. There are so many contradictions in the tax figures that I am happy that my core model is correct. It proved to be sound on the main taxes (VAT & Income Tax) reflecting real activity, which unfortunately for us show an economy still in serious decline.

After seeing the November figures, I had assumed that the Corporation Tax figures would sail well over the €4,000M by year end because of those due to make payments in December. The failure to do so suggests that prior year repayments remain an issue.

Michael's point regarding the multi-national V local business is crucial and I hope to come back to it in far more detail after the publication of the Finance Bill. This is normally discussed as the difference between GNP/GNI & GDP. In Table 1.2. of Measuring Ireland’s Progress 2008, GNI is estimated at 85.8% of GDP but the Dept. of Finance projections suggest it will fall to 78%, bringing us on a par with Luxembourg. The Dept. is implicitly assuming jobless growth in any recovery, even encouraging it. A pay off of perhaps 3-5% will be made in Corporation Tax for facilitating the laundering process is not worth the damage these policies will do to the rest of the economy.

To deal with Michael’s other point regarding NAMA, I cannot agree more. I distributed Dr. Morgan Kelly’s recent research to some work colleagues for their views. The strongest responses were in relation to this one line “The destruction of the Irish entrepreneurial class may prove one of the most enduring and costly consequences of the property bubble.” Passive speculation versus long-term investment has tied up our capital. I wonder how many of the senior managers in MNCs in Ireland became personally involved in property speculation?

There is a clear need to bring our national accounts into balance, but our current taxation policies will not do that. No effort will be made to change those policies because they will undermine the NAMA project. Dr. Kelly’s line may be the epitaph of the era.

Foolish Penny said...

..."our total dependence on multi-nationals and the Public Sector"...

What a horrible (yet unsurprising) position to find ourselves.

Proposition Joe said...

confirm our total dependence on multi-nationals and the Public Sector ... for employment and taxes

@An Saoi

Could you hazard a very rough breakdown of the MNC:public:indigenous sectors for employment and income tax receipts?

I would have guessed something like 10:20:70 for employment, and maybe 20:30:50 on income tax.

But obviously those ratios are nowhere near total dependence, so I must be totally off the mark.