Tax projections are a hit-and-miss affair

THE pattern of annual tax miscalculation by the Department of Finance has been well established.

Exchequer returns for 2005 are well ahead of projections after just three months.

There are indications that the amount of tax could be close to €1 billion more than projections based on the figures for the first quarter of the year, which showed a surplus of €880 million.

That’s well up on the surplus of €272m for the first quarter of 2004 and points to another very strong year for tax revenues, economists said.

As a result, the Budget deficit will be closer to €2bn than to the €3bn deficit contained in the Budget forecasts.

While still early days, strong economic growth suggests a good year for tax buoyancy and economists are suggesting extra revenue cold be close to €1bn above forecasts.

Why the department and the minister always get it so wrong seems a reasonable question, which we put to a few economists.

Two schools of thought exist.

One is that the Department of Finance likes to keep a tight rein on spending, irrespective of who is in power.

By underestimating what the minister will bring in taxes, the theory is that it limits the amount he or she can spend in a given year.

Another view exists suggesting it is difficult to get the sums right given the diverse nature of the taxation system.

A classic case from a few years ago was the forecast for Capital Gains Tax (CGT) following a decision by then Finance Minster, Charlie McCreevy, to cut the level from 40% to 20%.

Those opposed to the move argued that by cutting CGT, the minister would seriously reduce the take to the State.

The following year, the figure taken in from CGT had nearly doubled and it has continued to be a strong performer.

Looking back over the past few years, the perception that the Department of Finance always underestimates the amount of tax it brings in doesn’t quite stand up to scrutiny.

The year 2001 was a howler in terms of serious overestimating of what was going to flow into the State’s coffers.

That year the government was hit by a €2.5bn tax shortfall and a projected surplus of €3bn ended up at just €644m for the year.

This was after the bursting of the hi-tech bubble in the US.

Last year, the opposite happened.

The Finance Minister took in €2bn more in tax in 2004 than he had anticipated as the economy started to show very strong growth.

In 2003, tax income was higher by €450m while in 2002 it was €75m less than had been expected.

Overall, the past five years have been hit and miss in both directions.

But anytime the Minister for Finance was in trouble, he usually pulled a rabbit out of the hat to ensure the books balanced close to what he had predicted on Budget Day.