Corporation tax needs to be monitored closely and factored into future fiscal plans
The publication of the exchequer returns for the end of November represented the icing on the cake for the Government, as it comes towards the end of its last full year in office, and faces into a daunting general election in the first quarter of next year.
November is a big month for tax revenues and this year it did not disappoint.
Tax revenues during the month were €470m ahead of target, and, for the first 11 months of the year, revenues are running €2.9bn ahead of expectations.
The three big tax headings, Vat, income tax and corporation tax, account for 92% of the overshoot.
Vat is ahead by €341m, income tax is ahead by €51m, and corporation tax is ahead by a massive €2.3bn.
The exchequer has now taken in its full-year target in the first 11 months, and anything taken in December will be a bonus. It will be a significant bonus.
The reasons for some of the overshoot are not difficult to understand. Vat receipts reflect strong consumer spending.
For example, the latest figures from the Society of the Irish Motor Industry show that new-car registrations in November were 23% ahead of last November and in the first 11 months they are 30% ahead.
New-car sales make a strong contribution to the exchequer coffers.
The income tax take reflects more people at work and some growth in earnings, but perhaps income tax receipts might be expected to be stronger, given the strong growth in employment.
The corporation tax take is more difficult to understand.
It reflects improved profitability, but accounting changes relating to global corporation tax developments may also be having an impact.
If so, then there has to be a concern that the surge in receipts from the corporate sector might contain an element of once-off adjustment.
This one needs to be monitored closely and factored into future fiscal plans.
However, the Revenue Commissioners have confirmed to the minister for finance, Michael Noonan, that all but €300m of the current surge is real.
Let’s hope that this turns out to be the case.
From the perspective of the minister for finance, this is all good news.
The budget deficit, this year, is now expected to come in at 1.7% of GDP and just 0.7% next year.
These numbers are much lower than expected and suggest that, all going well, the budget will move into surplus in 2017.
This would be a remarkable achievement, following such a calamity in the public finances in recent years.
Let us reflect on the fact that the long-term target for the end of 2015 was to bring the deficit under 3% of GDP.
There is definitely enough good news in all of this to make even the most cautious minister for finance a little bit arrogant.
This would not be advisable. Much of Ireland’s recovery has been driven by a very benign set of external circumstances over the past couple of years.
Three of those factors, ECB interest rate policy, the weak euro and low oil prices, all look set to remain supportive in 2016, but there have to be concerns about global growth.
We have heard much about the travails in the Chinese economy in recent months.
Other notable signs of distress, this week, came from Canada, where growth stagnated in September.
In the US, the index of manufacturing activity fell to 48.6, which signals a contraction in activity.
This is the first time since the recession ended, in 2009, that manufacturing has contracted.
While manufacturing is roughly 12% of the US economy, and the rest is doing well, its weakness does reflect the strength of the dollar and the weakness of global demand.
It is the latter point that should concern us.
The bottom line is that some moderately cold international winds are now starting to blow and Ireland cannot remain immune.
Therefore, a prudent approach to managing the public finances, by whomever forms the next government, should be an absolute priority.
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