An Saoi: That paragon of objective comment, the Sunday Independent, informed us last Sunday that "Public finances (were) buoyed by July Revenue takings", which sort of gave the game away. The Government had something to hide. The by-line informed us that “Income tax receipts 'better than expected'”, and so they were. Income Tax paid in the month to the Revenue Commissioners was €852M against €837M expected, though still far below the July remittances of previous years. To emphasise this possible little green shoot the Dept. of Finance “Information Note” also informs us that “it is important to note that it came in ahead of its monthly target for July.”
July’s unemployment figure goes some way to explain the discrepancy, available here. No longer are the foreigners being let go (Table 9), no longer are the forms P45 going to shop workers and those in the building trade. Table 6 provides a stark analysis of those recently sent on their way. No: this time, 24.3% were professionals and 31.7% in administrative roles. Accrued holiday pay and ex-gratia termination payments paid as they walk through the door for the last time provided a temporary boost in the tax yield, which will be claimed as refunds over the next few months. 75.6% of those let go this month were female, but 82.1% of the professionals sacked were women and 86.4% of clerical/admin staff let go were women. These were core staff to most of the businesses in which they worked. And they have few immediate job prospects
Income Tax is in fact €289M behind a target set less than six months ago, and a massive €483M behind July 2009. Refunds of tax due to the recently unemployed will no doubt increase that discrepancy.
Next, let us look at Excise & VAT together. Excise yield has held up well despite (because) of the reduction in duties on alcohol and the cut on VRT charged on imported new cars. The substantial differential that has opened up between diesel & petrol prices along the border has also boosted fuel sales in this State. However, VAT remains nearly 7% below last year’s figure. The continued decline in retail prices is clearly one factor; however, the continuing decline in demand for goods and services is the real problem. Spending on credit cards is a very good barometer of consumer sentiment and dropped substantially in June 2010 over June 2009, despite glorious weather for the whole month. Approx. two thirds of the annual VAT liability is paid in the first seven months, suggesting that the final outcome is unlikely to break €9,700M, nearly €1,000M short of last year’s outcome.
Our yield from consumption taxes remain very much at the whim of currency movements and UK tax policy. The UK Government are thankfully playing Russian roulette with the Northern economy, with their VAT increase in January next. There is little we can do about currency movements; however, targeted cuts in VAT would give us some protection in ensuring that prices remain attractive on this side of the border.
Corporation Tax looks like the one possible source of Revenue picking up. Most of the big refunds arising from losses in banking and property should have been washed through at this stage, while many of the US multi-nationals who use Ireland to launder their EMEA sales are announcing bumper profits. I have tried to project forward for the last five months of the year using the preliminary tax paid to date & would expect to see the final CT yield in excess of the target, though still well below 2009 and earlier years, say in the region of €3,400M. This should not be seen as a sign of improvement in local economic conditions, but rather as reflecting the activities of a handful of large multi-nationals using Ireland as their sales base.
The other tax sources remain anaemic, though Capital Acquisitions Tax remains robust. Very simple adjustments could dramatically improve the yield. Capital Gains Tax is low with little activity in the sales of assets. The same applies to Stamp Duties. The tax base remains very worryingly narrow as we approach a further slowdown in activity. Yields from the main four sources may yet dry up to a mere trickle.
It is very hard to see how the current Government can hold to their promises of no pay cuts in the Public Service, when they will be cutting services and Social Welfare payments left, right and centre. A 10% cut looks probable with serious consequences for tax yield.
The outlook for the current year remains poor, with 2011 also beginning to look ominous.