Tax receipts 2.8 billion below expectations-Hairshirt budget anticipated in December

Figures released by the Department of Finance show another sharp deterioration in the public finances last month. Tax receipts are now almost €2.8 billion short of budget time projections.The tax shortfall for 2008 will be double (€6bn) the amount predicted by Brian Cowen and Brian Lenihan a mere 7 weeks ago when they said that there would be a €3billion shortfall in taxes, according to Fine Gael's Deputy Leader and Spokesman on Finance, Richard Bruton T.D .The Exchequer deficit for the first eight months of the year was just over €8.4 billion. This is three times the figure for the same period last year.

August is the worst month on record with tax revenue over 20% short of expectation. It is anticipated that the Exchequer deficit will amount to €10 billion by the end of the year.

Total tax receipts were just under €24.8 billion, with VAT receipts running more than €1.1 billion behind expectations as consumer spending weakens. Stamp duties are almost €500m behind target and capital gains taxes are more than €400m lower than expected. The contraction in the building industry is a major causative factor here. Income tax is around €150m behind expectations.

"The Government has breached the 3% Stability Pact constraint on borrowing. It is heading for 4% borrowing in 2008 as a percentage of GDP. It will in all probability come in at 4.5%- 5% in 2009.

It is time to take out the hair shirts once more. A savage December budget is a certainty.

The excessive rise in public expenditure-13% in 2007- in the run in to the 2007 General Election has further exacerbated the situation. The Government now has nothing in reserve to stimulate the economy. All in all not a very pretty picture in the run up to Christmas

Irish Housing Market decline continues

Irish house prices fell by 9.2% on the year in April, compared with a 8.9% decline in March, according to the independent think tank Economic & Social Research Institute (ESRI), and Permanent TSB bank. The average price paid for a new house in April 2008 was EUR 280,981, while that paid for a second hand house was EUR 278,987. The equivalent levels in December 2007 were EUR 290,296 and EUR 284,608. The full story appears here

• The 2% rise in Euro interest rates has has taken the fizz out of the market.
• The failure to radically reform Stamp Duty is a further drag on the market.
• According to figures provided to Fine Gael by the Department of Social and Family Affairs, people under 35 now make up more than half (52.9%) of the total number of people who were added to the Live Register in the past year. The figures also show that there are now 97,071 people under the age of 35 who are on the live register, the highest figure recorded since records were fully computerised in 2003 and that the number of people in the 20 to 34 age group who are unemployed has increased by 45% in the past twelve months.



• Almost 220,000 houses and apartments are lying vacant across Ireland
  New housing starts are expected to drop to 45,000 as confidence has ebbed away. Indeed this figure may be optimistic.


• House price inflation skyrocketed in recent years. Houses have been priced out of the reach of large segments of the middle class. The salaries of teachers, guards and nurses are insufficient to purchase houses.

The correction in the market has not completed its course. There is evidence that many potential house purchasers are holding off confident in the expectation that a further sizeable reduction is in store. Indeed with EU inflation rising to 3.6% -up from 3.3% it appears unlikely that the ECB will reduce interest rates in 2008.
2008 is developing into the annus horribilis for the Irish property market.

Irish Economy-Storm clouds gather

The CSO says an extra 12,000 people signed on the Live Register in March.
This follows an increase of 8,500 in February. Since December alone the number of claimants has gone up by 30,000

The Exchequer figures reveal that after just three months, tax revenue is €600 million behind Budget day projections and €727 million down on the same time last year. The fact that nearly all taxes are significantly behind predictions (Capital Gains Tax and VAT at €311 million and €253 million respectively) suggests the downturn in the house building sector has now spread across the economy. Fine Gael Enterprise, Trade & Employment Spokesman Leo Varadkar TD has said, "In contrast to previous months, when new arrivals on the dole queue were mostly men, the 12,000 increase in March was split evenly between men and women. This confirms that the housing downturn has now spread from the male-dominated housing sector to the wider economy, discrediting Mr Cowen's assertion that what we are witnessing is simply a 'housing sector adjustment'.

House completions in 2006 were 93,419. Completions for 2007 were 78,027. Brian Cowen estimates house completions for 2008 at 55,000. However it is more likely to be closer to 45,000. Failure to tackle the Stamp Duty issue promptly damaged confidence. Also a 2% rise in interest rates helped to burst the bubble.

With inflation stubbornly high at 5%, high interest rates, rising fuel costs and falling house prices, 2008 is shaping up to be a very difficult year for the economy. According to Fine Gael the cost of Government-regulated services has risen by 45% since 2002 and accounts for one half of all non-mortgage inflation.

The Government has sought to blame external factors. This is only partially true. The Government itself opened the purse strings in 2006 and 2007 and allowed an unsustainable escalation in public expenditure. In 2007 it rose by 13%. This poured petrol on the flames and over inflated economic growth leading to a feel good factor, which enabled the Government to win the 2007 General Election. Now the Government must endeavour to reign in public expenditure at a time when the economy could benefit from a stimulus.
Gradually growth projections for the year have been revised downwards. The country could face an Exchequer deficit of over €6 billion for 2008.

Ireland: House construction nose-dives

In 2006 approx 93,000 new houses were built. In 2007 this dropped to 78,000. The prognosis for 2008 is bleak with forecasts generally in the range of 40,000 to 45,000 house completions. The estimate for 2009 is even bleaker with suggestions that figures could drop to 37,000. In 2007, 20,000 construction workers were laid off
Clearly the bubble has burst.

There are a number of reasons for the slow down:

(1) The 2% rise in EU interest rates is a contributory factor.

(2) Uncertainty on the Stamp Duty issue contributed to the instability.

(3) Excessive house price inflation has priced houses out of the reach of many in the middle class.

(4) The Government tax takes is too high.

(5) The 5% general inflation rate has weakened purchasing power.

(6) Up to 200,000 houses remain unsold.

A major reduction in EU interest rates will not be sufficient to return the house building sector to health. Further reductions in VAT and Stamp Duty are required. The 200,000 overhang in unsold houses must be substantially cleared. A further substantial reduction in house prices is required. General inflation must fall substantially.

The implications for Government finances are quite severe. There was an Exchequer surplus of €2.3 billion in 2006. A deficit of €4.9 billion is projected for this year.
Tax receipts for January and February are 684 million lower than for the corresponding period in 2007 . VAT receipts for January and February are 7.3% lower than anticipated whilst Stamp Duty receipts are down 44% on the first two months of 2007. The unemployment hate has risen to 5.2%. A rocky road lies ahead for the economy.

Ireland-Construction Downturn

There is increasing evidence of a downturn in the building industry. House prices are overvalued by about 20% . Some optimists forecast that the moderate fall in house prices would have run its course by early 2008. It is more likely that the correction underway will continue for some time. The spectre of negative equity looms for some.
There are several reasons for the decline in house building:

• The 2% rise in interest rates has impacted strongly on repayments.
• Many builders were over optimistic in their assumptions in relation to future demand. They are now left with unsold houses.
• There has been an unsustainable rise in house price inflation.
• The Government takes 30%-40% of the cost of a new house in tax.
• The Stamp Duty issue has not been resolved.
• Unemployment has begun to rise.

There is a tendency to scapegoat economists -like David McWilliams- who have forecast choppy waters ahead. Some have gone so far as to blame them for the fall in house prices. This is of course nonsensical.

There are indications that on average builders have up to 10 new houses unsold in some parts of Ireland. In 2008 a more conservative approach will be adopted. Forecasts for 2008 vary widely.It is likely that new house starts will drop from 90,000 to 60,000 in 2008. There is a danger that it could drop to 50,000 as builders must first off load large numbers of unsold houses.

The growth rate for the economy will drop to 3.5%-This is the benign scenario. Government cutbacks rising oil prices and a housing crisis could drag the rate down to 1% or less.