In Business
Tax revenues behind plan in May, but earlier than expected recovery should see improvement in the months ahead
By Simon Barry & Lynsey Clemenger, Ulster Bank Capital Markets
Jun 8, 2010 - 12:10:02 PM

Following a better than expected month for tax revenue in April, there was some slight slippage in May. Tax receipts totalled Eur3.112 billion in the month, some Eur141 million behind the Department of Finance’s monthly target. Income taxes were the predominant source of the tax shortfall in May. They came in some Eur133 million below the estimated monthly outturn, thus reinforcing the message from the Live Register figures earlier today, namely that the labour market conditions remain pressured.

In contrast, VAT receipts continued to hold up well. May is a VAT collection month, with some Eur1.4 billion planned for (for ref: Eur205 million was collected in April).  Revenues came in Eur29 million ahead in the month and were Eur52 million ahead of plan in the year to May. While this represents a minor overshoot, the key point is that receipts in this key source of tax revenue are now running ahead. This is consistent with the firmer tone to recent retail sales and consumer confidence numbers. 

Given the modest slippage in May, the cumulative position for the year to date deteriorated from being essentially in line with the Department’s target in April to running Eur148million behind. However, in annual terms the trend continued to move in the right direction, with the rate of decline easing back from 10.8% to 10.4%. Budget 2010 forecast tax revenue for this year at €31.05 billion, some 6% behind the 2009 outturn of €33.04 billion.

Our base case is still that tax receipts will fall by less than this, primarily as a result of the increasing signs of an earlier than expected economic upturn than that envisaged at Budget time. However, for this view to remain on track we will need to see continued improvement on the tax revenue front in the months ahead, with base effects also likely to help along the way.

Spending by government departments is down almost 9% y/y, led by particularly large declines in capital expenditure

On the spending side of the accounts, the May numbers provide more evidence of considerable restraint.  Total spending by Government departments is down 8.9% in the first five months of this year compared to 2009, reflecting a decline of Eur1.7bn in nominal terms. 

The majority of this has occurred on the capital side, which is down Eur890 on the same period in 2009.  That represents a 36% decline on year ago levels and leaves capital expenditure running some 20% behind plan for this stage of the year.  The Department of Finance ascribes the deviation from profile to timing issues, which is not entirely unreasonable given the often-erratic payment profile on large project-type spending items. 

However, it is somewhat strange that such a large shortfall has emerged so early in the year, especially considering that we are only three months into the planning period (the profile was published by the Department in early March).  The Departments of Transport and Environment together account for over 70% of the shortfall.  The capital spend in each case is running some Eur130 million behind plan which may give rise to concerns in the construction sector about slippage in the roll-out of infrastructure projects.

Day-to-day spending is 5%, or Eur850million, below 2009 levels which leaves it running in line with profile.  Department of Social Protection spending picked up in May, and is up 13% y/y.  However, looking at expenditure patterns outside of this area reveals a 10.5% drop compared with last year.  This represents an impressive degree of spending cuts in what is traditionally a difficult area to achieve nominal reductions.

Spending restraint reinforces Ireland's reputation as a "credible deficit reducer"

Overall, the tax take in May fell shy of our expectations.  However, given the many indications lately that economic recovery is kicking in earlier than expected, we continue to think that tax receipts will likely surprise to the upside in coming quarters. 

Meanwhile, the confirmation that discretionary spending, especially of the day-to-day variety, continues to run well behind year ago levels serves to reinforce the point we made last month that Ireland is clearly demonstrating that it is a “credible deficit reducer”.

Simon Barry          
Chief Economist, Republic of Ireland 
Ulster Bank Capital Markets  
3rd Floor 
Ulster Bank Group Centre
George's Quay 
Dublin 2

Tel:   +353 1 6431553  
Mob: +353 86 3410142

Fax:   +353 1 6431672
Email:   simon.barry@ulsterbankcm.com 
Website: www.ulsterbankcapitalmarkets.com   
 

Lynsey Clemenger
Economist, Republic of Ireland
Ulster Bank Capital Markets
3rd Floor
Ulster Bank Group Centre
George's Quay
Dublin 2

Tel: + 353 1 6431565
Fax:  +353 1 6431672

Email:  lynsey.clemenger@ulsterbankcm.com
Website: www.ulsterbankcapitalmarkets.com