Tax revenues came in ahead of the of the Department of Finance’s monthly plan for the third consecutive month in October. This marks a clear improvement in performance relative to earlier in the year when the tendency was to disappoint. The monthly overshoot in receipts in October totalled €284mn. This not only represents the largest degree of outperformance relative to plan so far this year, but the biggest upside surprise in any month in almost four years (November 2006 to be exact). In terms of the detail, the main source of the upside surprise in October was in corporation taxes, which came in €238mn ahead of target. Stamp duties and excise taxes were also ahead of expectations last month, to the tune of €75mn combined.
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Looking at the cumulative figures for the year to October, revenues are some €243mn or 1.0% ahead of plan. The situation in the important area of tax revenue has been moving the in right direction in recent months, with the result that year-to-date tax revenues are now running ahead of the Government’s target for the first time this year.
While, at €24.7bn, tax receipts are 5.4% behind the corresponding period in 2009, the rate of decrease has moderated considerably from the large double digit declines seen earlier in the year and is now at its smallest since January 2008. In fact, the position in October beats the Government’s 6% end-year target for the tax shortfall, meaning there is still a small degree of wiggle room in the two remaining months of the year. This leeway may be helpful given that timing issues may have played a role in October’s outperformance, particularly in the case of corporation taxes and stamp duties. Certainly at this stage it looks as though tax receipts are broadly on track to hit Minister’s €31bn full-year target from the 2010 Budget day back in last December. However, this is subject to two main caveats. 15% of the total year tax intake is due this month, with a decent performance here critical. Furthermore, the performance of the economy into year end will have an important bearing.
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Departmental spending restraint even more evident as expenditure now running 2.7% lower than plan
Turning to spending levels by government departments, the October numbers show considerable savings on both a year-ago basis as well as relative to budgetary targets. Total voted expenditure is running €1.6bn, or 4.2%, lower than last year.
Expenditure is also running over €1bn, or 2.7%, behind plan as government departments continue to deliver greater than-anticipated expenditure restraint. Note this is a greater degree of spending control than evident in last month’s figures which showed a 2.5% shortfall. The major pull-back in capital spending is very much ongoing, with capex levels now €1.4bn lower than the same period in 2009, corresponding to a 29% y/y fall. The cumulative savings in the year to October over and above what was originally budgeted for now amount to €1bn.
We have consistently highlighted the fact that capital spending was running well behind plan from very early in the year, which we took as an indication that additional savings were likely to come through from this source. And with only two months of the year remaining, that now looks certain to be the case – a point acknowledged by the explanatory note from the Department which referred to the expectation that “there will be some significant savings in capital expenditure at year-end”.
But the pattern of spending restraint goes beyond the capital side. Day-to-day spending is now also running below target, albeit by a modest 0.1%, reflecting a level of spending which is 0.6% lower than this time last year. Elevated levels of spending on social welfare (up 24% y/y) continue to mask the considerable discipline which is clearly being brought to bear in other areas. Outside of the Department of Social Protection, current spending is over 9% lower than in 2009 and is 1% lower than anticipated for this stage of the year.
Better tax receipts, even greater spending control mean net spending/tax situation €1.3bn better than expected
Ireland is clearly in the dog-house as far as the financial markets are concerned, judging by the fact that the Irish bond spread has widened out to new record highs of over 4.8% today. However, today’s exchequer figures show that tax revenues are ahead of plan, and that spending by government departments is considerably lower than plan. Despite the doubts which investors clearly have about the sustainability of Ireland’s fiscal position, we continue to regard Ireland as a credible deficit reducer.
The combination of the largest monthly upside surprise in tax receipts in some four years and significant ongoing spending restraint leaves the net tax/spending situation running €1.3 billion better than expected. This is a very helpful starting point as the Government finalises its much-awaited four year fiscal plan – a plan which takes on even more criticality given the latest deterioration in investor sentiment.
Simon Barry
Chief Economist
Ulster Bank Capital Markets
Republic of Ireland
3rd Floor
Ulster Bank Group Centre
George's Quay
Dublin 2
Tel: +353 1 6431553
Fax: +353 1 6431672
Email:simon.barry@ulsterbankcm.com
Lynsey Clemenger
Economist
Ulster Bank Capital Markets
Republic of Ireland
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
Website: www.ulsterbankcapitalmarkets.co
