Goodbody Stockbrokers have today warned that tax revenues will have to reverse recent trends if the budget deficit forecast (0.9% of GDP) laid out in last month’s Budget is to be hit.

They have also questioned some of the decisions to ramp up spending once again at year-end for the second consecutive year on the back of higher revenue outturns. They warn that this strategy has backfired on Ireland in the past.  

The budget deficit amounted to €4.4bn in the first ten months of the year, relative to €5.0bn in 2015. With spending up by €500m (1%) yoy, growth in revenues (+€1bn), mainly tax revenues (+€1.65bn), were the source of the improvement. However, there has been a slowing in tax revenue growth as the year has progressed (+4.7% yoy to end-October).

Taxes are now €600m ahead of original expectations but all of the overshoot is due to corporation tax receipts (€821m). Income tax and VAT, the two largest categories, grew by a relatively modest 4% and 5%, respectively, in the first ten months and were behind expectations. 

On the spending side, prudence has been maintained throughout the year (voted current spending is flat year on year) but it appears that the prudence may be abandoned in the final two months of 2016. Goodbody estimate that voted current spending will grow by 10% to reach the full year estimates set out in the budget. 

According to Goodbody Stockbrokers, "In Budget 2017, on the back of higher than expected revenues for 2016, the Government decided to effectively spend the extra windfall instead of achieving a lower budget deficit. This was dependent on a strong finish for the year for tax revenues. November will be crucial in this regard, with large payments of corporation tax and self-employed income tax due. We estimate that tax returns need to grow by 8% yoy in the final two months if the €48.1bn forecast is to be met."

Source: www.businessworld.ie