The 2014 Budget outturn was very different to that envisaged when delivered

Ireland’s Budget for the following calendar year is now presented in early October, which increases the probability of forecast errors. Such errors are a feature of any fiscal projections but are notable in the Irish context; the median difference between the  forecast Exchequer balance and the outturn over the past fifteen years is €2.5bn. This is not to put any blame on the Department of Finance or to suggest any inherent bias ( the  sample is evenly split between overshoots and undershoots relative to target), but rather to highlight that errors are highly likely in an economy as volatile and open as that of Ireland, and that unexpected events can and often do materialize.

Take the 2014 budget. The fiscal projections were predicated on real economic growth of 2% , including a pick up in consumer spending and a very modest contribution from the external sector, with exports forecast to grow by 1.9%. It now seems likely that the economy grew by 5% last year , with exports growing at a double digit pace. Moreover, consumer spending growth was probably less than 1% while inflation has been much lower than forecast, although the labour market has been much firmer, with the unemployment rate averaging around 11.5% against the projected 12.4%.

The Budget arithmetic had anyway changed by the beginning of the calendar year, with debt service costs  then seen to be €400mn lower than initially envisaged and revenue boosted by  the full amount of receipts from the sale of the national lottery (instead of half).As a result of these factors and other changes the projected 2014  Exchequer deficit was revised down in April to €8.7bn from the original Budget target of €9.6bn

It also became clear early in the year that tax receipts were running ahead of profile and that trend continued over the course of 2014, with a final outturn €1.2bn above target; tax revenue grew by 9.2% instead of the envisaged 6%. All tax headings came in above expectations with the exception of the Local Property Tax , including a  €400mn overshoot in VAT, €234mn from Corporation tax and  in excess of €200mn from Stamp duty, including monies from the pension levy.

That tax oveshoot would have resulted in a deficit below €7.5bn, all else equal, but in the event  the Government chose to use some of the largesse to increase spending. That decision was taken relatively late in the year as expenditure has been on or below target for much of 2014, but  at end- December  emerged €840mn or 2% above profile. Most of this additional outlay went on Health, which begs the question as to the realism of the original target spend for that Department.

As a consequence the Exchequer deficit for 2014 emerged at €8.2bn, above what might have been achieved but well below the original target of €9.6bn and  the lowest deficit since 2007. The NTMA funded the shortfall by borrowing a broadly similar amount and used existing cash balances (i.e. previous overfunding) to repay €8.2bn to the IMF.

So one might say it turned out all right in the end but somewhat different from that envisaged when the Budget was originally delivered, an all too common experience for the Irish exchequer and one which implies it would be fruitless for Ireland to try and fine-tune economic growth via fiscal policy, even if that were possible given euro rules. On final point: the Government is now using the Irish semi-state companies (particularly the utilities) in a more aggressive way to raise revenue, with dividends  received amounting to €475mn in 2014, against €264mn in 2013 and €112mn in 2012. The ESB alone ( and therefore its customers) have  has contributed €840mn since 2008.

Tax Take in December implies weak consumer spending

The  Irish Exchequer returns to end-December showed tax receipts for the full year at €37.8bn which is in line with the revised estimate published by the Department of Finance in mid-October. This represents a 3.2% increase on 2012 although still €150mn adrift of the original Budget projection, which was predicated on stronger economic growth than eventually emerged. The last month of the year often throws up surprises and so the authorities will no doubt be relieved that the (revised) target was met although that satisfaction may also be tinged with some disappointment following a very buoyant tax intake in November, which opened the prospect of a strong end to the year for the Exchequer. In the event December proved a very weak month in terms of receipts, with tax revenue coming in €360mn behind profile, or 12%, with all the main headings  adrift, including a very large shortfall in VAT, which came in at €89mn instead of the projected €211mn. The implication is that Irish consumers did not spend as freely as some expected in December, at least before the post-Christmas sales.

Non-tax current receipts were stronger than expected, however, ending the year at €2.7bn against an original forecast of €2.4bn (thanks in the main to the ELG scheme and increased dividends) so total current receipts ended the year at €40.5bn or €200mn ahead of the Budget projection. Voted spending came in 0.4% below profile for 2013 as a whole although again that masks a very strong spending round in December, particularly on the capital side, as the undershoot was over 2% at the end of November. Total current spending actually rose over the full year, by 1.6%, but this reflects higher debt costs and masks a sharp (4%) fall in day to day expenditure.

The combination of revenue growth and spending restraint has led to a steady fall in Ireland’s fiscal deficit although 2013 still saw a Current Budget shortfall of €10.6bn. The capital Budget was boosted by the State’s decision to sell various financial investments in Bank of Ireland and Irish Life with the result that the Capital deficit was  around €5bn smaller than originally envisaged, at €870mn. The overall Exchequer deficit came in at €11.5bn against an original target of €15.4bn and broadly in line with the revised projection of €11.3bn made a few months ago.

On the funding side the authorities drew down the last of the monies available from the Troika , raised some €2bn from State savings products, and used the proceeds from bond issuance early in 2013 to buy back some of the bonds due for redemption this month. That transaction meant that net funding broadly matched the Exchequer deficit leaving cash balances at the end of 2013 at €23.6bn and as such largely unchanged from the previous year. This cash pile is expensive to hold ( given short term yields are virtually zero) but means that the authorities do not have to fund this year unless they want to, but will have to weigh the costs of increasing those balances against the benefit of  returning to the bond market in the near term.