Meitheamh

An tSaoi05/07/2010

An Saoi: This has been a busy week for the publication of economic information, not least the June tax figures. We now have the 2nd quarter’s figures, and in the Table above I have compared them to, a) the Government’s projection and also the 2nd Quarter of 2009.

It seems that some of the Government’s policies are working. In particular the adjustment to excise to stem the flow of money across the border has, with the help of the strength of sterling, considerably improved sales of certain goods. I gather that stock leaving bonded warehouses has increased considerably and the price differential on petrol and particularly diesel makes it worthwhile coming South for a fill up. This will of course only increase from January next, when the UK VAT rate moves to 20%. A modest reduction in excise duty on fuel could ensure a substantial increase in this cross border trade and inflict serious damage to the Six County economy.

Assuming the continuation of this pattern, the Government may collect much more in this tax, despite no increase in local consumption. A targeted reduction in VAT, as has been argued elsewhere on this site on goods and services such as hotels and restaurants, would provide a serious fillip to those industries, increasing and maintaining employment. This is particularly so with VAT rates in the North moving in the opposite direction.

Corporation Tax is high this month with the first instalment of payments due for companies with a 31st December year end. This tax will be quiet again until October. The imponderable is the level of large repayments within the system, which may fall to be repaid over the next few months. Many companies may also have front loaded payments to ensure no interest charges arising if they underpay by accident. I am still however of the opinion that the company will struggle to hit their target here.

Income Tax is the key problem, and despite the imposition of the Income levy continues to collapse. It is very hard to see the Government getting within €500M of its target Employed numbers continue to fall and with a planned reduction of 25,000 in public service numbers, the trend will only continue. The long rumoured redundancies in AIB and Bank of Ireland must also be on their way.

I was of the opinion during 2009 that Income Tax yield held up because of the size of ex gratia redundancy payments. The degree of the fall in Income Tax in the last few months is down to a variety of reasons such as less people at work, salary reductions, cuts in bonus payments etc. However I have heard anecdotally that many multi nationals have paid increased bonus payments as well as general pay increases. It would be of interest if the Revenue published more information on this issue

The size of the current Budget deficit has been achieved with considerable difficulty to date. Further reductions required can only be achieved by substantial reductions in numbers and I feel pay levels, which will of course hit the yield from Income Tax. Capital expenditure cuts alone will not make up the difference. Borrowing at a real interest rate of more than 6% clearly makes no sense at all. Nominal GNP and GDP are going to come into their own, because the debt is very real. As Dr. Seamus Coffey of UCC’s Economics Dept has pointed out – core inflation continues to drop. This can only lead to further falls in tax yield

Looking at my previous estimates, two figures seem far too low, a) VAT & b) Corporation Tax. If sterling remains strong and there is no effort to increase duties in this State, then at least an additional €800M will fall to the Irish Exchequer from VAT. This is made up of no shoppers going North and fuel sales coming South. The Corporation Tax figure bears no relationship to the Irish economy and with increased profits being washed through the Irish laundry the cleaners’ few cents could yet be quite large. However I cannot see the figure breaking €30,000M for 2010, which still leaves the Government with additional cuts to make.

The level of unpaid taxes must also be increasing quite considerably. Areas such as services must be under quite a strain as taxes such as VAT are levied with little VAT credits claimed by way of inputs. It is worth the risk to try a little economic stimulation by following the French example and cutting VAT on restaurants & hotel accommodation. A reduction to say 6% from 13.5% would be a positive move and if it is found not to be having any effect, after twelve or twenty four months, could be withdrawn. Then at least the Government could say it tried.

Posted in: Fiscal policy

Tagged with: exchequer returns


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