The latest Exchequer returns for the first half of the year published yesterday show that the growth in tax revenues, particularly for income tax, points to an economy that continues to grow robustly.
Goodbody Stockbrokers believe Ireland is on track to hit, and possibly exceed, its budget deficit target in 2018 once again. While spending growth is lower than expectations at this stage, there is clear evidence that the purse strings have been loosened this year.
The figures show that taking taxes first, revenues grew by 5.4% year on year (yoy) in the first half of the year, slightly ahead (0.7%) of government expectations. The biggest contributor to annual growth is income taxes, which grew by 7.7% yoy. This backs up the trends in the labour market, where the unemployment rate has fallen to 5.1% in June, while wage growth has also accelerated.
The biggest outperformer is corporation tax, which grew by 15% yoy, and was 9% ahead of government expectations. The one disappointment is VAT receipts (+3% yoy); we would have expected a better performance given the buoyancy of the Irish consumer.
Government spending grew by 8% yoy in in the first half of the year, with voted current spending up by 6% and voted capital up by 29% yoy. Despite the strong growth in capital spending, it is behind expectations at this stage, but will likely catch up as the year progresses. Current spending is on target, but there is a sizeable overspend in Health, offset by underspending in some other areas.
According to Goodbody Stockbrokers, "Finance Minister Donoghue recently stated in the Government’s Summer Statement that he would not use all of the available fiscal resources available to him in Budget 2019. Instead, some of the money would be funneled to a rainy-day fund or remain unused. Given the very little spare capacity remaining in the Irish economy, as judged by the labour market in particular, this is the correct strategy in our view."