Wednesday, July 2, 2008

Ireland-Exchequer deficit is €5.65bn for first six months as recession looms.

The Exchequer returns show a deficit of almost €5.65bn for the first half of the year (2.75% of GDP). Tax Receipts at €19.127 billion are €1.45bn lower than anticipated for the first six months of the year. The lower tax receipts are due mainly to the poor performance of VAT and capital gains tax. The tax shortfall for the full year is expected to come in at €3bn. The collapse in the house-building sector has impacted strongly on tax receipts. Only 40,000-45,000 new houses will be built this year. The folly of over reliance on this sector is plain for all to see.

Total current receipts in the first half of 2008 were €19.525 billion compared to receipts of €21.124 billion for the same period in 2007.
Non-tax revenue in the first six months of 2008 was €398 million. This compares to €310 million for the same period last year.

Brian Cowen’s Government must administer some harsh medicine. The country faces swingeing public expenditure cuts and huge rises in stealth taxes as Finance Minister Brian Lenihan attempts to grapple with the problem. Increased exchequer borrowing will also help plug the gap. In addition interest rates will remain high as the European Central Bank grapples with inflation. Increasing interest rates at this time is economic lunacy and will serve to strengthen the Euro further. This will reduce exports from the Euro zone. Irish exports have begun to lag. Much of the Euro inflation has resulted from higher oil prices. So it is arguable that interest rates should not be increased.
Tightening of lending policies by the banks will hinder investment.

Pay rises below the rate of inflation will take further steam out of the economy. There is a danger of stagflation if public expenditure cuts are too severe.
In addition unemployment has risen rapidly in recent months. It broke the 200,000 barrier last month and currently stands at c207,000. Where is the purchasing power to come from if the consumer lacks sufficient disposable income?

In recent tears public expenditure has galloped out of control. It rose by 13% in 2007 in the run in to the General Election and by 50% over four years. Huge tax receipts from the then booming building sector funded much of this. The FF/PD Government erred in not restraining public expenditure. Excessive public expenditure fuelled inflation in an economy that was already growing strongly.
It threw petrol on the fires of economic growth. Restraints in public expenditure in good times would have provided the Government with some leeway.

There has been a tendency to dump on economists who warned that this scenario would unfold. David McWilliams, Alan Aherne and George Lee in particular have come in for strong criticism. Richard Bruton FG Spokesman on Finance has long criticised Government policy. Critics were accused of talking down the economy. Of course this is utter nonsense
Interestingly George Lee was referred to today on an RTE programme as George Gloom. Attack the messenger when you do not like the message. What utter nonsense. It is time for realism.
Some debate has cantered on the dreaded “R” word. The country is either in recession or about to enter a recession. It can weather the storm.

No comments: