The Irish Exchequer’s Annus Mirabilis

It is not uncommon for the Irish fiscal balance to end the year in a very different position than envisaged at the time of the Budget presentation and 2015 has seen more of the same, albeit with a larger than normal  forecast error. This  time the divergence is on the positive side, with the Exchequer emerging with a  cash deficit of just €62mn instead of having to borrow €6.5bn as originally projected. As a result  the level of debt will be lower than forecast and the debt ratio in 2015 may be below 96%  of GDP from 107.5% in 2014.

A key factor in the much better than expected outcome is a number of unbudgeted capital receipts, amounting to almost €4bn.  Early in the year the National Pension  Reserve Fund transferred €1.6bn from the sale of Bank of Ireland shares to the Exchequer, with the latter then benefitting from the sale of Permanent tsb shares (€0.1bn)  and Capital notes (€0.4bn) . The sale of the State’s holding in  Aer Lingus  netted another €0.3bn and in December the Exchequer received €1.5bn from AIB, with the latter redeeming  part of the Preference shares issued in 2009.

Current receipts were also much stronger than expected in 2015. Non-tax revenue came in at €3.5bn instead of the €3bn projected, largely reflecting higher profits at the Central Bank, and tax revenue was €3.3bn or 7.8%  ahead of the initial Budget forecast. This  was in part due to much stronger than expected economic activity ( real GDP probably grew by at least 7% last year against a 3.9% forecast) which led to overshoots in income tax (€379mn), VAT (€170mn)  and Capital taxes (€254mn). However the main driver was an extraordinary forecast error in terms of Corporation tax, which emerged €2.3bn or 49% above the original projection.

On the spending side, debt interest was €0.7bn below forecast, offset by higher  voted current expenditure, following a decision in October  by the Government  to spend some of the unexpected tax bounty,  Nevertheless, total current spending was only marginally ahead of the original Budget target and 1.3% lower than the 2014 outturn. Overall, the current Budget was in deficit to the tune of just €4mn which alongside a capital deficit of   €58mn produced the €62mn Exchequer shortfall.

The General Government balance , the preferred EU fiscal measure  , excludes transfers across the Government sector and includes additional adjustments which have to be confirmed by Eurostat. It would seem though that the General Government deficit is likely to be around €3.2bn,  which is  €2bn below the original projection  and  equates to 1.5% of GDP , against  the Budget target of 2.7% and the revised 2.1% estimate made a few months ago.

The 2015 fiscal outturn also means that  the 2016 Budget assumptions now look redundant. The latter envisaged a 5.8% increase in tax receipts from an expected base of €44.6bn, giving a 2016 tax figure of €47.2bn. That now only requires a rise of 3.5% to achieve given the €45.6bn figure actually received in 2015.  So if tax receipts do indeed rise by 5.8% this year’s figure will emerge at €48.2bn or €1bn ahead of the target announced in October’s Budget. On that basis the projected deficit of €2.8bn could be €1.6bn, or just 0.7% of GDP instead of the 1.2% currently forecast.

On the face of it then the Irish fiscal situation has been transformed and the outlook is indeed positive although there are two caveats. One relates to the international backdrop, which may be less supportive for the economy in 2016. Another relates specifically to Corporation tax, the source of over two-thirds of the tax overshoot last year. A forecast error of that magnitude clearly raises the risk around any projection  of the corporate tax take in 2016 and hence the overall revenue figure.