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.