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Government to wield axe after €8bn tax shortfall
Sunday, January 04, 2009 By Ian Kehoe and Niamh Connolly
There was an €8 billion shortfall in the tax take last year, forcing the government to seek major cuts in public spending in 2009. New figures, to be published tomorrow, will show that the tax shortfall was more than €1.5 billion worse than predicted by the government at the time of the budget last October. T his now seriously undermines the budget calculations for this year.

At its first meeting of the new year on Wednesday, the cabinet is expected to discuss a memorandum from Minister for Finance Brian Lenihan outlining the scale of savings in public spending now needed in 2009. Significant cuts will be required to stop borrowing spiralling way above the target of 6.5per cent of GDP set in the budget.

The 2008 tax revenues were down by more than 15 per cent on projections made at the start of last year. The annual figures will show that income tax, Vat and corporation tax are all significantly behind both 2007 levels and 2008 government estimates.

The rapid deterioration means that the outlook for this year is much worse than anticipated when the budget was drawn up in October. This will force the government to adjust its budgetary estimates and its economic forecasts for the year significantly downwards.

A new strategy for correcting the public finances is now being worked on in the Department of Finance. Lenihan has said that he will close the gap this year by cutting spending rather than increasing taxes, but further tax hikes seem certain to be included in next December’s budget.

Turlough O’Sullivan, director general of employers’ body Ibec, said all options, including a public sector pay freeze and pay cuts, would have to be considered in the social partnership discussions due to start this week. However, David Begg, general secretary of Ictu, said that any talk of extending the pay freeze or pay cuts was ‘‘hypothetical’’.

Lenihan is awaiting final reports from all departments outlining expenditure savings for 2009. Sources said that the recently-established public expenditure review body - the so-called ‘An Bord Snip Nua’, headed by economist Colm McCarthy - will inspect each report and propose other cuts. While the government has said that McCarthy’s organisation will report back to it by June, it is understood that it will report on an ongoing basis to the government, meaning that cuts in some areas could be introduced quickly.

Worryingly for the government, tomorrow’s figures will show taxes down across the board. Vat receipts plummeted €2.3 billion below expectations, while capital gains tax is down by between €1.8billion and €1.9 billion.

Stamp duty receipts, a barometer of the strength of the property sector, are more than €1.1 billion behind target. The tax take for December is also down sharply on expectations, with a Christmas bounce in consumer spending failing to materialise.

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