Exchequer returns bode well for budget

It is hard to believe, but following the release of the end of August exchequer returns this week, there will only be one further set released before the October budget.

From the perspective of Michael Noonan and the Government, the returns to the end of August represent exceptionally good news and suggest he will have no problem whatsoever in delivering a budget adjustment of at least €1.5bn on October 13, while still remaining well within his budget targets.

The fiscal purists will argue that he should adopt a more cautious approach in order to balance the budget more quickly and create a cushion in the event of something going wrong down the road.

While there is logic to such an approach, the reality is that it makes no sense whatsoever from a political perspective.

The Government is wilting under the pressure of the Irish Water debacle and opposition parties are playing all manner of political games in relation to the report on the former Garda commissioner’s departure.

Consequently it will need to be able to deliver a generous budget next month in an effort to curry favour with a seemingly disillusioned electorate.

In the first eight months of the year, the exchequer ran a deficit of €1.29bn, down from €6.3bn in the same period last year.

While there are some exceptional items impacting, such as the sale of shares in PTSB and transfers from the National Pension Reserve Fund, the performance of taxation is making a very significant contribution.

Arguably, there are two key indicators one should look at to see what is really going on in the economy.

The labour market is one, and we got evidence last week that the economy is creating jobs at a pretty decent pace.

The second is the tax take.

After all, every time we engage in an economic activity, we pay tax for the privilege of doing so, and the more economic activities we engage in, the more tax we pay.

In the first eight months of the year, the total tax take at €27.34bn was almost €1.4bn ahead of what the Department of Finance expected and is 9.8% higher than the equivalent period last year.

By any stretch of the imagination, this represents a decent level of tax buoyancy and the breakdown shows that the buoyancy is broadly based.

Income tax is running 6% ahead of last year and is €146m ahead of target.

This reflects the growth in employment and the commencement of a recovery in earnings.

The Vat take is 7.9% ahead of last year and is €107m ahead of target.

This reflects stronger consumer spending, and particularly strong growth in car sales.

Figures this week from the Society of the Irish Motor Industry, show that new car registrations were up 32% in August compared to last year, and for the first eight months are running 30% ahead of last year.

The sales of light commercial vehicles are running 52% ahead of last year’s data, which is a real indication of a recovery in business confidence and investment spending.

Indeed, the corporation tax take is 38.1% ahead of last year and is €912m ahead of target.

This is a clear indication of much improved trading conditions for the corporate sector, although anecdotally it is far from certain that the SME sector is sharing in the recovery to the same extent.

Nevertheless, business conditions are getting markedly better.

One assumes that on October 13, a further easing of the USC burden will be the main change on the taxation side, while if the minister wants to quell some of the voter disillusionment, focused spending increases in health and law and order would be most effective.

After years of very painful fiscal correction, it is great to be able to have a conversation about the scope for expenditure increases and tax reductions.

It is a measure of how much progress the economy is now making.

Meanwhile, equity markets continue to be very nervous and jittery and were certainly not helped by further evidence from China of weakening manufacturing activity this week.

China will remain the focus of international market attention and markets will remain very nervous, of that there is little doubt.


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