Ireland should move the Budget back to December

The last three Irish Budgets have been presented in mid-October, a departure from  the previous practice of delivering them later in the year, usually in early December. The change was triggered by new Euro  rules designed to improve economic surveillance (the two-pack)  which stipulated that member States ‘ must publish their draft budgets for the following year’ by October 15, although budgets need not be adopted till December 31. Ireland chose to present and adopt the Budget at the earlier date although others do not pass theirs till later in the year, and there are a number of reasons why the Irish Government should consider publishing a broad outline of its fiscal targets in October but wait till December to adopt the full Budget.

Ireland’s GDP is much more volatile than the norm across developed economies, which makes for large forecasting errors in terms of  economic activity and tax receipts ; the average  annual forecast error for the Exchequer balance  since 2000 is €1.5bn. Forecasting  the following year is difficult enough in early December as  the only published GDP data relates to the first two quarters of the year but at least there is some available information about the third quarter, which is not the case in mid-October.

Another factor is the November tax month, which includes income tax from the self-employed and is also a big month for corporation tax; in 2015, for example, total  receipts in November were expected to be  €6.5bn against a monthly average over the rest of the year of €3.3bn. Consequently, a much stronger or weaker November inflow may  not only render redundant the end-year fiscal projections made in October  but also compromise the forecast made for the  year ahead.

The past few months has highlighted that risk in Ireland, albeit this time  with the forecast errors on the positive side. The 2015 Budget projected tax receipts of €42.3bn, or 2.5% above the 2014 outturn, and it became clear as the year unfolded that economic growth was running well above expectations and  tax receipts would substantially exceed the initial target, albeit largely due to a massive overshoot in one category, corporation tax. In  October the Government formally revised up its tax forecast for the year, by €2.3bn to €44.6bn and announced additional spending of €1.5bn. The projected Exchequer deficit  was also reduced from the initial €6.5bn to €2.8bn, reflecting unbudgeted  capital receipts as well as the tax bounty. The Exchequer balance is a cash based measure  and the broader General Government deficit  (the preferred  EU fiscal metric) for 2015 was also revised down, to 2.1% of GDP from 2.7%, with a 2016 target of  1.2%.

The November Exchequer returns  have changed the picture. Receipts in the month came in at €6.9bn or €470mn above profile, leaving the overshoot year to date at €2.9bn, with corporation tax 58% or €2.3bn above expectations, a spectacular forecasting error. Spending is also still running behind the original target, so it appears unlikely  the Exchequer will actually meet the higher spending figures announced in October. The net result is that tax receipts will probably end the year at €45.4bn, 10% above the 2014 outturn and €800mn above the official estimate made just six weeks ago. That and the fact that the revised spending target will not be met implies an Exchequer deficit  of €1bn or less and a General Government deficit of 1.7% of GDP. Moreover,the Exchequer estimate does not include the €1.6bn payable from the partial redemption of AIB’s Preference shares so  a cash surplus for the year is possible, depending on when the money is transferred,

The 2016 Budget projected  a 5.8% rise in tax receipts which now implies a tax figure of €48bn next year or €0.8bn above the existing forecast, which even with the same spending targets gives a General Government deficit of 0.9% of GDP instead of the budgeted 1.2%. Of course there is no guarantee that  the 2016 tax receipts will emerge on target ( particularly in relation to corporation tax) but on the face of it fiscal policy in Ireland was tighter than the authorities wanted it to be in 2015 and will now be tighter than planned in 2016. Government debt will be lower as a result on this occasion but a return to a December Budget would probably reduce the  scale of forecast errors, although not eliminating them.

Government to spend tax bounty in final three months of this year.

Earlier in the year the Irish Government spelled out what the EU rules  on   Exchequer expenditure meant for the 2016 Budget; the fiscal space available was around €1.3bn, which could be used to fund tax reductions or spent. That figure then became a €1.2bn to €1.5bn range, with the Coalition indicating a probable 50/50 split between additional expenditure and tax cuts. What is now clear, following the overnight release of the White Paper on Receipts and Expenditure, is that spending will  be substantially higher than initially planned in 2015, thanks to a spree  over the final few months of the year. Essentially, the authorities are choosing  a deficit  of 2.1% of GDP instead of the 1% figure that might have been achieved.

Tax receipts were originally  expected at €42.3bn this year but by April the Department of Finance had revised that figure up by €1bn,  and it soon became obvious that the outcome would higher still. Finance now expect €44.6bn or €2.3bn (5.4%) above the initial target. Non-tax receipts are also stronger than forecast, by some €0.4bn, thanks to higher profits at the Central Bank, while savings on debt interest provided an additional windfall for the Exchequer.

The Government now plans to spend most of that unexpected bounty. Voted current expenditure ( essentially day to day government spending) was projected to fall  to €38bn in 2015, from €39bn in 2014,  and has been running  marginally below profile year to date, coming in at €29bn at end-September. Spending could  therefore amount to  €9bn over the final three months of this year to hit the Budget figure. The White Paper shows that spending will  now end the year at €39.5bn, which implies  €10.5bn will be spent in just three months .

The capital deficit is also larger than it appeared likely,  at €1.7bn, with money transferred  from the Exchequer to the Ireland Strategic Investment Fund. Consequently the Exchequer cash deficit ( current budget balance plus capital balance) is now projected at €2.8bn, with the General Government deficit ( the EU’s preferred fiscal measure) at €4.4bn. Finance has also revised up its forecast for Irish GDP this year, to €210bn, so the deficit equates to 2.1% , substantially below the initial 2.7% target but also well above what might have been achieved had the Government chosen to adhere to  the  initial spending plans.

As to 2016, Finance expects current receipts to rise by over €2bn and expenditure to be broadly unchanged, resulting in a current budget surplus,  which  alongside a modest capital deficit gives an  Exchequer cash deficit of  only €0.8bn.The General Government deficit is projected at €1.9bn, or 0.8% of projected GDP. There is an argument that the economy does not need any additional stimulus ( GDP is deemed to be operating at  2.5%  above potential by the EU) but it appears unlikely that the 2016 Budget will  not use the available fiscal space of up to €1.5bn, taking the post-Budget deficit forecast to €3.4bn or 1.5% of GDP. On our estimates this would imply a structural budget deficit of 2.6% ( i.e. taking account of the economic cycle and the official view that we are in a boom) against a 2015 outturn of 3.2%, so the decline would be above the 0.5% required under EU rules.