Public finances continue to run comfortably ahead of expectations

Exchequer Returns released by the Department of Finance show that the Exchequer deficit at end-August 2014 was €6.3bn compared to €7.3bn in the same period last year.

The deficit is €1.3bn (0.75% of GDP) ahead of the Budget 2014 consistent profile, driven by increased tax receipts and reduced interest expenditure.

On the revenue side, last month’s tax take, at €2.5bn, was €423m or 20% ahead of target. While this is flattered by delayed stamp duty income and once-off non-recurring corporation tax receipts, the underlying tax performance is very strong, with all of the five major headings well ahead of their monthly profile. Year to date revenues, at €24.9bn, are +8.7% y/y and 4.1% (€971m) ahead of target.

The largest tax heading, income tax, produced revenues of €10.6bn in the first eight months of 2014, +9.1% y/y and 1.7% ahead of profile. Some of this outperformance is due to higher than profiled receipts from the Life Assurance Exit Tax, but the income tax performance is also being helped by the improving trends in the Irish labour market. The main consumer headings, VAT (+8.5% y/y and 3.7% ahead of profile at €7.4bn) and excise (+5.8% y/y and 5.2% ahead of profile at €3.2bn) are enjoying a good year, helped by positive trends in consumer spending. Corporation tax receipts are +5.4% y/y and 8.5% ahead of profile at €2.4bn, but some of this outperformance is due to the non-recurring items noted above. Stamp duty receipts are +4.9% y/y and 35.6% ahead of profile at €646m, but this is flattered by timing issues. The other tax headings are more or less on target.

On the expenditure side, overall net voted (discretionary) spending, at €27.5bn, is -1.7% y/y and 0.1% above profile. Within this, net voted current expenditure is 0.4% or €115m above profile at €26.2bn due mainly to a €353m health overspend, but despite this it is 1.7% below year-earlier levels. Net voted capital expenditure is -1.7% y/y and 5.7% below profile at €1.3bn.

The Exchequer’s total debt servicing costs in the first eight months of the year, at €5.5bn, were +1.3% y/y, but within this interest expenditure is running 7.5% below profile due to the early retirement of some of the January 2014 Treasury bond in December and a favourable rate reset on the floating rate bonds issued as part of last year’s IBRC Promissory Note deal (and mainly held by the Central Bank, whose profits are effectively remitted back to the Exchequer).

Confirmation that the public finances continue to run comfortably ahead of expectations will undoubtedly strengthen the hand of those looking for the brake to be applied to the government’s fiscal consolidation drive in next month’s Budget. The previous €2bn target for new fiscal measures is clearly dead in the water, but given that both the numerator and denominator for government deficit calculations have form for behaving unpredictably, we reaffirm our view that the Minister should incorporate a buffer to protect against shocks when working out his budgetary arithmetic. Source: Philip O’Sullivan, Investec.