Investec – Exchequer deficit comes in at €1.1bn

Exchequer Returns released by the Department of Finance (DoF) reveal that the recovery in the Irish public finances remains intact.

For the opening four months of the year the headline Exchequer deficit came in at €1.1bn, less than half the €2.3bn deficit booked in the same period in 2015. The overall narrative is one of strong growth in underlying tax revenues, robust non-tax revenues and contained spending.

To start with the revenue side, overall tax receipts in the period to end-April came in at €14.0bn, +9.1% y/y and 3.5% ahead of the DoF’s profile. Of the nine major tax headings, seven of these recorded growth over the prior year, while six were ahead of profile. The DoF cautions that “there were some significant one-off and timing factors, which have helped flatter the April tax position”.

The main positive surprises in terms of tax receipts were in the areas of Corporation Tax (€759m, +20.8% y/y and 70.8% or €315m ahead of profile) and Excise (€2.1bn, +28.7% y/y and 10.9% or €204m ahead of profile). The Corporation Tax beat likely reflects a combination of timing issues; improved trading; and the benefits accruing from the sizeable ‘purchase’ of intangibles (mainly patents) by multinationals with a presence in Ireland in 2015, while the Excise performance reflects strong consumer discretionary expenditures (particularly on cars, where previously released CSO data show growth in sales of 30.0% y/y in Q116). These were more than sufficient to offset a slightly disappointing €4.2bn VAT print (+3.4% y/y but 3.8% or €164m behind profile) – given the improving macroeconomic backdrop Investec expects that this underperformance will prove temporary, while it also notes that April is not a VAT due month.

Non-tax revenues surged to €2.0bn in the opening four months of 2016 from €0.4bn in the same period of 2015. This growth is mainly due to the timing of the receipt of €1.8bn of Central Bank surplus income this year, the benefits from which were partly offset by the non-repeat of last year’s €203m special dividend from the State electricity utility.

Turning to spending, gross voted (discretionary) expenditures came in at €17.3bn, effectively flat (+0.2%) on the outturn for the same period in 2015 but 0.5% (€87m) lower than had been forecast. Both current and capital expenditure came in lower than expected, although there was (once again) a noticeable overrun in health expenditures. The interest cost on the national debt was within 0.5% of profile.

Excluding those transactions with no general government impact produces an adjusted balance of -€1.9bn, 49% better than the -€3.8bn profile.

The DoF’s current fiscal projections assume growth in tax receipts of 3.6% for FY 2016 and a marginal increase in gross expenditure. These look conservative when set against the outturn to end-April, so the risks to the DoF’s forecast of a general government deficit equivalent to 1.1% of GDP look to be to the upside (note that Investec currently estimates that the deficit will come in at 0.3% of GDP this year).

Philip O’Sullivan