Little fiscal room for Paschal Donohoe’s first budget

New finance minister Paschal Donohoe will have a limited amount of fiscal muscle to flex in his first budget in October to help bolster the Coalition, as exchequer figures showed tax revenues were still running below target at the half-year stage.

Unlike two years ago when the Government splurged around €3bn in spending increases and tax cuts before the election, the budget finances this year are reined in by EU spending rules.

The latest figures showed the exchequer had collected tax revenues of over €23.4bn in the first six months, up 4% from the same period last year. Tax revenues are more robust at end Q2, providing a level of confidence the Budget 2017 target will be achieved, according to the Department of Finance.

But the shortfall still means the State’s revenues are still running €110m short of projections at the half-way point. Such a shortfall was highly unusual in recent years when the Government tapped huge bounties to overshoot its targets.

In June, the exchequer collected just over €4bn—some €158m above the amount forecast, which will help settle some jitters about the finances. There were contrasting performances across the “Big Four” sources of taxes, however.

The underperformance of income tax revenues has puzzled economists and Government officials this year, with the level of returns seemingly at odds with steadily rising employment figures. In the early months of the year, income tax receipts were undershooting monthly targets.

The Department of Finance had requested the Revenue Commissioners to examine the components, including the Universal Social Charge, which make up income tax revenues.

The department now says the income tax conundrum is no longer the issue it once was.

Income tax revenues through 2017 could yet fall short but the underperformance against targets is now better understood by officials.

In the first six months, the exchequer took in over €9bn in income taxes, and in June, at €1.42bn, income tax revenues fell short of its target by the small amount of €11m.

But June’s underperformance means that at the half-way stage the gap between what was taken in and what was expected from income tax revenues has nonetheless widened, to €214m.

The performance of taxes based on consumer spending and company profits differed sharply in June. At €78m in June, Vat receipts were €52m, or almost 40%, short of target, but over the full six months were 3% ahead of target, at €6.9bn.

That will reassure the Government over consumer spending even though industry figures show sales of some big-ticket items such as new car sales have fallen sharply this year.

In June, the exchequer took in over €1.85bn in corporation taxes—which was €205m more than expected. At the half-year, that brought corporation tax revenues to over €3.52bn, a modest €20m more than projected.

The Department of Finance said nonethless that that points to a good outturn through 2017.

“A good June means a good December,” said an official.

At €533m, excise duties brought in €19m more than expected, in June. But at over €2.78bn, excise has underperformed in the full six months by €84m, affected by delayed plain packaging plans for tobacco.

Meanwhile, capital receipts shot up dramatically to almost €3.96bn, mainly due to the AIB shares sale.

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