Ireland – Tax Revenue shortfall for 2008 to reach €8 billion plus (The 2009 current deficit is likely to come in at around €8 billion)

Figures released show a massive shortfall of close to €7.5 billion in the amount of tax revenue collected by the Government during the first 11 months of the year. Already revenue projections in the October budget are seriously out of line. The October budget forecast a total tax shortfall for 2008 of €6.5 billion. It is now probable that the shortfall for the year could exceed €8 billion. Tax revenue is 16 per cent behind projections made at the start of the year. VAT is €2.1 billion below expectations, capital gains tax is down €1.7 billion and stamp duty is €1 billion below target.

The 2009 Exchequer deficit appears headed for €16.5 billion and the associated General Government Deficit is likely to be 8% instead of the 6.5% projected in the recent Budget. The 2009 current deficit is likely to come in at around €8 billion.
These are horrific figures, which rule out the possibility of a financial injection by the government to reflate the economy. The government has absolutely no leeway. The over expansionary budgets in 2006 and 2007 by the FF/PD government led to an increase in public expenditure of 25% and also fuelled inflation. This was tantamount to pouring petrol on the raging fires of economic growth at a time when it was necessary douse the flames. This spending was supported by revenue from an unsustainable property boom.

The government is now trapped. It lacks the financial wherewithal to boost the economy. Internal revenue sources are shrinking. The property bubble has burst. Unemployment has reached 251,000 and will continue to rise sharply.

The FF/Green government will endeavour to tackle the problem by a combination of further public expenditure cuts and a reduction of public service numbers. It may also target public service pay. In a doomsday situation a 10% pay cut could not be ruled out.

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 -Exchequer deficit for 2006

The exchequer deficit for 2006 was just over €1.6 billion . This was more than three times Government projections. Stamp duty receipts for 2006 were €700+ million below Government expectations, while VAT receipts were almost €400m below the level anticipated by Brian Cowen. In addition public expenditure rose by 13% in 2006. The Government was determined to win the 2006 General Election and the massive rise in public expenditure contributed to a feel good factor. This provided a harvest of votes for FF at the ballot box. The rise in public expenditure was unsustainable.

The Celtic Tiger is no more. It has floated on a sea of excessive government spending and private borrowing. It has grown flabby. The government must take the scalpel to public expenditure. The withdrawal symptoms will be severe. The growth rate for the economy will drop to around 2%. Unemployment may rise quite sharply due to the down turn in building and construction. The electorate will now pay for the good times. This is the same scenario as unfolded in 2002 in the immediate aftermath of the general election.

The rise in the value of the euro against the dollar has insulated the economy somewhat against rising international oil prices and served to depress inflation. Nevertheless the governments record on inflation is poor. Inflation currently stands at 5%. Recently on RTE Tom McGurk stated that Brian Cowen left FG flat on the floor in debates on the economy in the run up to the 2006 General Election. Not for the first time McGurk's analysis was fatally flawed.
The next massive rise in government expenditure is anticipated to occur in the run in to the next general election-expected in 2011. After all the electorate has short memories.

Ireland-Exchequer Deficit Blues

Ireland will have a deficit of €1.62 billion this year, compared with an Oct. 2 forecast of €1 billion, according to the Department of Finance. This contrasts with a budget surplus of €4 billion just a year ago.

The Government must bear much of the responsibility for the deterioration in the public finances. In 2007 there has been a 13% growth in the rate of public expenditure as FF and the PDs wooed the electorate. This paid political dividends as the FF/PD government duly returned to power with the support of the Greens and Independents. Already many of the FF election promises have been binned. Prior to the 2002 General Election the FF/PD government allowed public expenditure to escalate out of control. In the immediate aftermath of the 2002 General Election FF Finance Minister Charlie McCreevy set about reigning in public expenditure and introduced a raft of stealth taxes. He failed to index income tax allowances thereby pushing large numbers of PAYE tax payers onto the higher tax rate. Prior to the 2002 Election FF and PD Ministers denied that there would be public expenditure cuts.

A similar scenario to 2002 has now unfolded in 2007. The Government will once more cut public expenditure and introduce stealth taxes. Over the next 2/3 years it will build up a a financial war chest. As the anticipated 2012 General Election approaches public expenditure will once more mushroom. Brian Cowen and Dermot Ahern -during the 2007 election campaign -strongly berated Richard Bruton(FG) Finance Spokesman when Bruton drew attention to both waste and rocketing government expenditure. He can now claim retrospective vindication. Many in the media have spoken of Cowen in messianic terms.

In less than two years the ECB has raised Euro interest rates by 2%. This has knocked some of the fizz out of the housing market. Stamp Duty receipts have slumped and lay offs in the building industry are increasing rapidly. This crisis has been exacerbated by the failure of the Government to reform stamp duty. House prices are falling and negative equity looms on the horizon. Mortgage debt in Ireland is now €136 billion. There is also an astronomical level of credit card debt.

New house starts may fall to c 55,000 in 2008. The huge slump in property tax receipts looks set to continue in 2008. In addition a tightening up of bank/building society lending policies will further restrict the amount of credit available to house buyers. For too long the government has been over reliant on taxes from the property market to boost public expenditure. One eighth of the workforce is employed in construction. 20% of private sector workforce depends on construction.

Rising energy costs will reduce economic growth.This has implications for unemployment which is already rising. Rising unemployment will further depress tax receipts and damage consumer confidence.

For FG and Labour this was the election to lose.