Tax revenues behind plan again in June, as income taxes underperform…

Tax revenues fell behind for the second month running in June. While the €80 million shortfall in the month will in itself have no significant bearing on budget arithmetic, it is notable that, following the solid performance in April, the tax revenue position has continued to deteriorate. Of some comfort here is that the weakness in June was not broad-based across tax categories, with receipts in almost all tax heads coming in roughly in line with the Department of Finance’s monthly plan. Rather the shortfall in June was concentrated in income taxes, with receipts in this important category some €84 million behind expectations.

Indeed, looking at the first half of the year, income taxes are the main source of the €227 million cumulative shortfall in total tax receipts. When they are excluded, tax revenue is actually running some €76 million ahead of plan, driven by a better than expected performance in the VAT and corporation tax categories. In the case of VAT, the better performance in the second quarter in particular is almost certainly linked to the improving trend in consumer spending, as evidenced in the monthly retail sales figures.

Expenditure restraint dominated by €1bn cut in the capital spend vs. ’09 levels…

Turning to expenditure, overall net voted spending by government departments was €141 million lower than expected in June.  Indeed, for the first half of the year as a whole expenditure is running some €500 million, or 2.3%, behind plan and €1.4 billion, or 6.2%, lower than year-earlier levels. 

However, the aggregate picture masks some pronounced divergence when one looks at the relative trends in the current and capital spend.  In particular, the deviation from plan in June was dominated by a major shortfall of €219 million in capital spending – the fourth consecutive month in which capital spending has been some distance shy of the Department’s profile which was set out in March. 

In total, capital spending is now running €609 million below anticipated levels for this stage of the year.  That equates to a shortfall of almost 25% which is the largest percentage shortfall of the year.  As noted last month, the shortfall is most notable in the Departments of Transport and Environment which together account for over €400 million of the underspend.  With total capital spending now running €1 billion (or 36%) lower than 2009 levels, this is a pattern which will do little to assuage the concerns of players in the construction sector who have been worried about the impact of retrenchment in the capital programme.  The Minister continues to ascribe the deviation from profile to ‘timing issues’ but that explanation is beginning to come under pressure given the large, and growing, deviation of actual spending levels from plan.

Meanwhile, day-to-day expenditure was higher than expected for the second month running in June.  This reverses the pattern of lower than anticipated spending in March/April and hints at a somewhat lower level of spending restraint on the current side lately relative to earlier in the year.  While total current spending is running 1.9% lower than levels seen in the first half of 2009, it is running a touch (0.5%) higher than plan.

Overall, as we pass the mid-way point of the year, the government’s budgetary targets are broadly on track.  Taxes outside of income tax are running slightly ahead of target, though we share the Minister’s concern on the poor income tax returns, for two reasons.  First, because of the risk that it represents to the revenue side of the public finance outlook, and second because of the signal that is sending about what is still a very weak jobs market.  Meanwhile, spending continues to run well below year-ago levels, though this is dominated by very sharp declines on the capital side; we would prefer to see current spending play a greater role here.

Simon Barry                                                                                             
Chief Economist, Republic of Ireland                                                       
Ulster Bank Capital Markets                                                                   
3rd Floor                                                                                                     
Ulster Bank Group Centre                                                                        
George's Quay                                                                                           
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Email:   simon.barry@ulsterbankcm.com

Lynsey Clemenger
Economist, Republic of Ireland
Ulster Bank Capital Markets
3rd Floor
Ulster Bank Group Centre
George's Quay
Dublin 2
Tel:  +353 1 643 1565
Fax:  +353 1 6431672
Email:  lynsey.clemenger@ulsterbankcm.com