Irish Government may not be able to spend any tax bounty

The latest Exchequer figures show that Irish tax receipts are again well ahead of profile, raising the prospect of a much smaller fiscal deficit  in 2016 than planned and tempting the new Government to spend some of the largesse before year end. That was the case last year but this time is different and any tax bounty may have to be used to reduce debt rather than to increase expenditure, although of course economic shocks such as Brexit may mean that bounty is smaller than now appears.

The 2016 Budget projected tax revenue of €47.2bn for the year, implying a 3.6% rise on the 2015 outturn. That appeared a modest target and at end-May receipts were running 8.9% up on the previous year  and €770mn or 4.3% ahead of the monthly profile. That aggregate overshoot is very similar to the pattern in 2015, with corporation tax again the main factor, although this time excise duty is also extremely buoyant, with income tax on target and VAT running below expectations.

By the autumn of last year the tax overshoot had accelerated to almost 6% and the Government announced supplementary estimates, intending to spend a fair proportion of the windfall. In the event  they did not manage to spend as much as indicated although voted expenditure still ended the year some €1.3bn above the original target.Tax revenue continued to exceed expectations, emerging 7.8% above profile, or a massive  €3.3bn.

At that time the only EU fiscal constraint on Ireland was to get the deficit below 3% of GDP, which was duly achieved even with the additional spending ( the final figure was 2.3%). In 2016  there are two constraints, however, with neither relating to the headline deficit. The first is the expenditure benchmark, which sets a limit on permitted expenditure in the year. The second is that the fiscal deficit, when adjusted for the economic cycle, must fall by at least 0.5% of GDP. Regular readers of this Blog will be familiar with the problems associated with determining  Ireland’s potential growth rate, and hence estimating the cyclically adjusted fiscal position. As it currently stands the Irish Government believes that  the structural deficit is set to decline by 0.4% while the European Commission argues that the reduction is only 0.1% and  has stated that ‘ further measures will be needed to ensure compliance in 2016′. The Irish Government will argue the case and other countries have been given leeway so the outcome is uncertain, but it may well be that the current tax buoyancy will not result in much or any additional  unplanned spending this year.

 

Published by

Dan McLaughlin

Economics Lecturer and Commentator