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The achievement of budgetary targets has been principally achieved
The key implications of today’s end year exchequer returns data are:
(1) The Irish Government has hit its budgetary targets for 2011. At a time when there have been major overruns in a range of other Euro area countries, this is a major positive that underlines Ireland’s commitment and its capability to meet its EU/IMF Programme targets.
(2) The achievement of budgetary targets has been principally achieved by a lower than expected outturn for public spending underlining strong implementation of Government spending restraints. Day to day Government spending was down 1.6% or €440 mio against last July’s profile.
At the margin, the capacity to deliver better than expected outturns for public spending may suggest greater scope to deliver increased savings in spending in coming years than are currently envisaged. These results highlight the greater control and certainty there is to savings from spending adjustments relative to tax increases. It is generally argued that spending based budgetary adjustments are preferable to tax based adjustments because they ‘shock’ private sector activity less. However, in crisis situations spending adjustments may also be preferable because spending is more directly controllable and predictable than tax revenues.
(3) The shortfall in tax receipts testifies to the weakness in the domestic economy in late 2011 and also points to some downside risks to tax revenue targets for 2012. The increasing divergence between the expected take from key tax categories such as VAT and income tax and the monthly returns through 2011 underlines the continuing weakness of domestic spending and the related downturn in Irish economic activity in the latter stages of the year. In such circumstances, meeting budgetary targets becomes hugely more difficult as tax revenues and GDP fall short of expectations. Again, this underlines the achievement in meeting the 2011 budget target.
The largest recorded shortfall in tax revenues was in Corporation taxes although just over half of the €500 mio shortfall in this area seems to reflect a timing issue as these funds were received in early January. That said, the weaker than expected outturn reflects the squeeze on profitability across the Irish economy.
Weaker trends in both VAT and income tax receipts of late emphasise the weakness of domestic spending and employment. Budget 2011 originally envisaged consumer spending being flat last year whereas a decline of around 3% now looks more plausible. Similarly, employment was expected to fall by 0.2% whereas numbers at work dropped by about 2% during 2011. This weakness in activity and the jobs market is entirely consistent with the shortfalls seen in VAT (-4.8%) and income taxes (-2.3%). Most other tax headings performed broadly as envisaged. Although the outturn for stamps was notably stronger than the original profile, this largely reflected the financing of the Government’s jobs initiative through a levy on private pension funds.
(4) Ireland’s General Government deficit should be comfortably within target and could fall just below 10% for 2011. Today’s budgetary data relate to issues and receipts through the Exchequer accounts. While these are the principal Government spending and income aggregates, a significant number of adjustments must be made to arrive at final figures for the General Government balance – the standardised deficit measure used across Europe which is the focus of market attention. While official data will not be available for several months, our rough calculations suggest that unless there is a surprisingly sharp drop in GDP or some other large and very negative technical adjustment in the final quarter of 2011 Ireland’s General Government deficit should be just below 10% for 2011.