The law of diminishing bad returns Sunday, July 05, 2009 By Richard Curran The battle to find words to describe what is happening in the economy has become as heated as the challenge of turning the situation around.
Last week’s GDP figures were described as ‘‘unprecedented’’ in the scale of the fall. Live register numbers set a ‘‘record’’ high, while exchequer figures for the first half of 2009 were tagged as proof of government ‘‘mismanagement’’.
As some commentators and government politicians scrambled to find an alternative perspective, they described how the ‘‘monthly increase on the live register fell back for the fifth month in June’’.
The live register figures were ‘‘less negative’’ and Minister for Finance Brian Lenihan talked about how the ‘‘rate of decline in overall tax revenue has eased’’.
The headline figures for all three sets of figures are frightening and unprecedented. The key questions are whether there are signs that the exchequer figures are at least meeting targets, and whether the recent trends in unemployment and the wider economy are becoming slightly more benign.
The most immediate challenges for government are stabilising the public finances and tackling rising unemployment. The exchequer figures for the first half of 2009 paint the clearest picture of how the government is performing in its primary short-term task. The exchequer deficit of €14.7 billion in the first half of this year is enormous when compared with the full-year deficit of €12.3 billion in 2008.
That €14.7 billion figure includes a €6 billion contribution to bailing out the banks. The worrying trend is that, a cross eight categories of tax revenue, receipts were behind target in six. The only two ahead of target were corporation tax, which was artificially boosted by changes to the timing of payments, and excise.
Despite two sets of income tax levies, the overall income tax take in the first half of 2009 was €3.3 billion less than in the same period last year. It gives an idea of how far off it would have been without the changes introduced in both the October and April budgets. However, despite being behind target in six categories, th e overall tax take for the six months was just 1.2 per cent or €188 million behind forecast.
This was the message that the government and some economists chose to take from the figures. However, there are more troubling trends within the numbers. Vat receipts and income tax have been the main drags on tax receipts so far this year.
A sizeable fall-off in consumer spending put Vat €201 million behind target so far, while the income tax take is €113million behind plan.
In June, the first month that the income levy hit the government’s coffers, income tax was still 9 per cent behind target. There are some seasonal factors to this figure, but it doesn’t augur well that the target was so far short of being met.
The figures paint a picture of an exchequer that is being squeezed on all sides. Rising unemployment is hiking up the social welfare bill, with every 1,000 people added to the live register raising the bill by €11 million per year. Income levies are taking money out of people’s pockets, which discourages them from spending, which in turn reduces Vat receipts.
There is a consensus view emerging that taxes cannot be used to bear the brunt of the fiscal correction any longer. Sharp reductions in current and capital spending will have to take priority in the next two budgets. However, targets pencilled in for the budget this December and next suggest there is more to come on the tax-raising side. This is likely to be met through the introduction of new taxes arising from the Commission on Taxation, as well as further hikes to existing taxes.
The expenditure side of the government’s books paint a different picture for the first half of this year. Total expenditure is running more than €500 million behind plan. According to Simon Barry of Ulster Bank,’ ‘this is a pretty substantial sum, given that the plan was finalised less than ten weeks ago’’.
Spending by the Department of Social and Family Affairs is more than €200 million lower than expected. This seems surprising given the rising live register numbers, but may reflect some slowdown in the rate at which people are signing on.
On the capital side, spending was 9.4 per cent or €298 million behind plan. This can be partially explained by delays that can occur with the timing of projects and the drawdown of funds. But, as Barry pointed out, it may also suggest a ‘‘de-prioritisation of this important area’’.
Overall, the exchequer deficit looks to be heading towards €25 billion for the year. Ironically, even if tax receipt forecasts are out of kilter, 85 per cent of this deficit has already been borrowed. The National Treasury Management Agency has raised more than €20 billion in recent months, despite very real concerns about Ireland’s economic stability and a recent downgrading of the country’s credit rating. It is a true reflection of the seriousness of the situation when managing to raise €20 billion in borrowing is presented as some kind of good news.
The run-up to the budget in December will be crucial in determining the government’s mettle in introducing the kind of cuts that are required to enable the country gradually to crawl out of its predicament.
In some respects, raising taxes has been easy, but the cuts that lie ahead will be much more difficult to introduce.
Somewhere in the middle of that major political challenge is the introduction of the National Asset Management Agency, and the need to retain and create jobs.
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