Michael Taft: I don’t want to pre-empt An Saoi’s more informed analysis of Exchequer returns, but there are some real issues emerging even at this early stage of the year.
The Government is hoping to increase the overall Exchequer tax take by €3.1 billion, or 9.9 percent over last year. This is a key determinant to whether the deficit will fall to below -10 percent of GDP (other determinants are public expenditure and the overall level of GDP). This projected increase is made up of increases in the following sub-categories:
• Income tax (including USC): 25.3%
• VAT: 1.3%
• Corporation: 2.4%
• Customs & Excise: 0.1%
• Capital Taxes: 4.5%
The real driver in the projected increase is income tax revenue which includes receipts from the Universal Social Charge. This category is expected to make up over 90 percent of the entire projected tax increase. Of the projected increase of €3.1 billion, income tax/USC is expected to increase by over €2.8 billion.
Why the increase of 25 percent? It’s not because the economy is growing – more employment, more businesses, more tax revenue. The primary reasons are the income tax changes introduced in the budget (cuts in personal tax credits, standard rate tax band, certain tax reliefs, etc.); and the introduction of the USC.
And here is where it starts to get murky. The USC amalgamates the Income Levy and the Health Levy into new thresholds. While the income levy was included in income tax receipts last year, the health levy wasn’t; it was paid directly into the Department of Health and showed up as a Departmental Balance in the Estimates.
What this means is that comparisons between last year’s tax revenue (for both income tax and overall tax) are somewhat skewered since they are not comparing like with like. So when we get headlines like ‘Tax receipts up over 2 percent’ – we have to treat this carefully since last year’s tax receipts didn’t count the health levy which is now part of this year’s USC.
Of course, the Department of Finance could have made this all easier by putting in a like for like comparison. This would have meant taking last year’s figures and adding last year’s monthly receipts of the health levy. This has not been done and I can’t find these monthly figures for last year.
Last year the health levy was estimated to raise €2,431 million. This relates to full year increase. The comparator for this year would be less as January receipts relate to December payments. Therefore, February is the first month that we have to readjust to see how this year’s income tax receipts relate to last year.
• February 2011 income tax receipts: €980
• February 2010 income tax receipts: €784
This might suggest a substantial rise over last year (25 percent) but we have to include the February health levy receipts for 2010 – a figure not readily available. So here is an extrapolation: €186 million. When we add that to the overall February 2010 figure we find the following:
• February 2011 income tax receipts: €980
• February 2010 income tax receipts: €970 (including extrapolated health levy receipts)
The increase for February, therefore, is not 25 percent as the Finance numbers suggest but, rather, 1 percent – and this is with the additional revenue arising from other Budget 2011 changes.
Therefore, the overall tax receipts do not show a 2.2 percent increase over last year. Rather, it shows a -1.7 percent decline.
We should pause here. It is, as they say, early days and we shouldn’t rush to conclusions. But the early returns are not good. The second biggest category – VAT – is showing sluggish receipts so far. They are -2.4 percent down on last year’s outturn and -5.9 percent on the Government’s targets this year.
Throughout the year the important categories to watch are income tax and VAT (it would help if the Department of Finance produced comparable data). Together, they are projected to make up 70 percent of all tax receipts. These best reflect domestic economic activity; corporate tax receipts can reflect the accounting activities of the multi-national sector; namely, transfer pricing and profit imports.
On present trends, the Government will come in about €1 billion under target. But these are early trends which could improve or worsen as the year goes on. Will the deflationary policies of the last two years –now deeply embedded in the economic base – undo the deficit reduction targets? Watch this space but don’t be surprised if the answer is yes.
Michael Taft @notesonthefront
Michael Taft is an economic analyst and trade unionist. He is author of the Notes of the Front blog and a member of the TASC Economists’ Network.
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