Ireland’s GDP is unusually volatile, as is government revenue, which makes for frequent forecasting errors in both. For the last three years the errors have proven positive, in that tax receipts have emerged ahead of Budget projections, resulting in lower than anticipated fiscal deficits as well as allowing the government of the day to augment spending in the latter months of the year. Unfortunately that serendipitous trend appears to be over, judging by the revenue figures available to end-April, and a tax undershoot for the year is looking more likely.
The 2017 Budget projected tax receipts of €50.6bn, and the Department of Finance still expects that to materialise, which requires a 5.8% increase on the 2016 outturn. Yet the annual increase over the first four months of the year is just 0.5%, with most headings actually down on last year, implying a serious risk of undershooting. Corporation tax has been the most difficult to forecast (exceeding the target by over €700m last year and by an extraordinary €2.3bn or 50% in 2015 ) and is currently some 23% down on 2016, with Stamp duty, Excise and Capital taxes also running well below the previous year in percentage terms.
The main exception is VAT, which is extremely strong, rising at an annual 14.5% or double the pace forecast in the Budget. This is curious given that retail sales grew by an annual 0.9% in the first quarter, but may reflect strong car imports and a rise in house completions. Income tax is also a puzzle, showing annual growth of just 1.2%, which appears at odds with other data implying a continuation of strong employment growth. The Budget forecast that Income tax receipts would end the year 5.6% above the 2016 outturn so , again, there is a lot of catching up to do if that target is to be hit.
The tax position against profile ( i.e. that expected on a monthly basis) is also likely to be of concern to the Government, with a shortfall of €345m or 2.4%. VAT is running €257mn ahead but that has been more than offset by large shortfalls elsewhere, including €225mn in Corporation tax, €200mn in Income tax and €120mn in Excise duty. The late Easter may be having an impact and Corporation tax is extremely lumpy on a monthy basis but the risk now is that the fiscal deficit will emerge above the current target of 0.4% of GDP. Moreover the 2016 outturn has now been revised down to just 0.5% so the 2017 figure may well be above this. A 2.4% shortfall in tax receipts at the end of the year, for example, equates to €1.2bn and all else equal would raise the deficit to 0.8% of GDP.
Does it matter? The Exchequer’s cash position will likely be boosted by proceeds from the sale of shares in AIB , so the debt ratio may well continue to fall. That transaction will not benefit the General Government balance, however, although Ireland has no longer to meet a headline target for the latter under EU fiscal rules. In fact there are two, related constraints, which will come into play for 2018. One is that the deficit adjusted for the economic cycle (the structural balance) has to fall by over 0.5% of GDP, and to aid in that process a limit is put on government spending ( the famous Fiscal Space). The latter is already closing given an array of spending commitments carried over into 2018 but the Government would not be able to use all the available space anyway if the tax base emerged below forecast in 2017.