TAX CUTS IN BUDGET 2015 WOULD BE PRE-MATURE
THIS ARTICLE APPEARED IN THE IRISH EXAMINER AUGUST 8th 2014
In relative terms, the Government is being inundated with good news on the economic and financial front at the moment. Most economic indicators in recent months have been moving in the right direction, and the news from the two main banks for the first half of the year has been more positive than we have seen for quite some time. Given that we are now well into the second half of the electoral cycle this does represent good news for the parties of government, and provided the recent trends are maintained or built upon over the remaining lifetime of the government, there might just be a relatively positive backdrop as they face into what could be a very politically tricky plebiscite.
What the government does or does not do in the remaining budgets could play a key role in influencing voter choices. Taxpayers have obviously taken a serious battering over the past six years, and the payment of the full-year property tax is hurting badly this year. At the moment we are being treated to a very damaging debate about the likely burden of the water charge next year. The sort of speculation and uncertainty that abounds at the moment in relation to the water charge is very destabilising as it is fostering fear and undermining confidence. There is nothing as dangerous as uncertainty, and the Minister with responsibility needs to create certainty as quickly as possible. At least if people have a clear idea of what the cost is likely to be, then they can plan with some level of certainty.
In terms of additional budgetary changes that might be implemented over the likely remaining two budgets of this government, the pressure is clearly starting to ease. Notwithstanding the fact that we are still borrowing too much as a country and that the level of outstanding debt is dangerously high, the public finances are gradually moving into a better place.
The Exchequer returns earlier this week showed that an Exchequer deficit of €5.18 billion was delivered in the first seven months of the year. This is €25 million higher than the equivalent period last year. However, last year’s figure included the proceeds of the sale of Irish Life and Bank of Ireland Contingent Capital Notes. When these non-recurring revenue items are excluded, the underlying deficit this year is almost €2.3 billion lower than the same period last year. Tax revenues are running €548 million ahead of expectations, and are 6.4 per cent up on last year. The three biggest revenue areas are performing very strongly. Income Tax receipts are 7.6 per cent ahead of last year and €54 million ahead of expectations; Excise Duties are 5.6 per cent ahead of last year and €132 million ahead of target; and VAT receipts are running 7.2 per cent higher than last year and €242 million ahead of target. These items are reflecting the improvement in the labour market and stronger consumer spending, particularly on new cars. It just goes to prove that economic growth is good for the public finances.
On the expenditure front, the Government is also maintaining tight control. Net voted expenditure is €172 million lower than last year and is €73 million lower than targeted. The current expenditure component is just €24 million higher than expected, while the capital expenditure component is running €97 million lower than expected.
This all suggests that the government remains well on track to improving upon the Exchequer borrowing target of €9.6 billion for the full year, and a General Government Deficit equivalent to 4.8 per cent of GDP. Granted, there is still five months left in the year with the biggest revenue collection month included, but based on current trends it is certainly possible that the deficit could come in up to a billion euro lower than expected and the deficit could hit 4.3 per cent of GDP.
Should it so desire, this would give the government scope to deliver a total budget adjustment of less than € 1 billion euro in October, which would necessitate marginal changes once the water charge receipts are taken into account. I believe it would be pre-mature for government to contemplate a tax cutting budget. That should be left for Budget 2016, which will likely be the final one before the general election. Assuming the government survives its full term, a relatively generous budget in October 2015 would be likely to give maximum political advantage to the parties of government.