The Department of Finance have released the September Exchequer Return which provides details for the first three quarters of the year. The relevant documents are:
- Exchequer Statement
- Analysis of Tax Receipts
- Analysis of Net Voted Expenditure
- Information Note from the Department
As per usual we will focus on the tax figures in the Exchequer Statement as most of the expenditure figures are based on the rather meaningless “net expenditure” concept. The general reaction to the tax figures has been rather positive. Here are the relevant stories from two of the broadsheets.
- Irish Times: Tax take ahead of target
- Irish Independent: Good news for government as tax returns on the up
I must say that I cannot see the justification for greeting the figures in such glowing terms. The headline figure is positive as the table here shows but when we work through the detail the sheen washes off somewhat.
Tax revenue is now almost €2 billion up on last year, which is supportive of the positive view given above. Monthly tax revenue in 2011 has been ahead of 2010 for each of the nine months to date.
The three noteworthy months are April, July and September. Tax revenues in April and July were higher this year because of earlier than expected receipts of DIRT tax. This was expected in October so we can expect some drop back then. In July there was also a bump in Corporation Tax due to timing issues. The reason for the September increase will be explained below.
This chart shows the performance of the eight tax heads for the year to date.
We can see that the “increase” in tax revenue is down to Income Tax and Stamp Duty. VAT, Corporation Tax, Excise Duty, CGT and CAT are all lower than they were last year.
Income Tax in the Exchequer Account might be up nearly €1.9 billion on last year but it must be noted that the government is not collecting €1.9 billion of extra revenue as a lot of this is simply a reclassification.
In the last December’s Budget the Income and Health Levies were replaced by the Universal Social Charge (USC). While the Income Levy was included under Income Tax in 2010, the Health Levy was actually an “appropriation-in-aid” for the Department of Health and Children and did not enter the Exchequer Account.
Money raised by the Health Levy went directly to the Department of Health. In 2010, the Health Levy generated €2,018 million in revenue. It is likely that at least €1.2 billion of that would have been collected by September. Under the USC this money now enters the Exchequer Account. A substantial portion of the increase in Income Tax is due to this reclassification. Tax revenue is “up” because we are now calling an existing revenue stream tax.
Once account is taken for these issues and the tax credit and tax band changes introduced in the Budget it is probably that Income Tax is performing just like the other five main tax headings – i.e. worse than last year.
The other tax showing an increase is Stamp Duty. This again is not the positive sign the bare numbers would suggest. Stamp Duty is only up because the €457 million collected as a result of the Pension Levy introduced in May’s “Jobs Initiative” is included here. If we compare like-for-like Stamp Duty revenue is performing just like every other tax – i.e. worse than last year.
The key increases are Income Tax and Stamp Duty which as we know are largely the result of a reclassification and a levy that was only announced in May. The apparent poor performance of Excise Duty is explained in the Information Note:
However, it should be noted that this is not a true reflection of the position as there was a delay in the transfer of some €112 million in receipts from this source proper to September into the Exchequer account. These receipts were not received in time to benefit the end-September figures.
Although VAT is lower than last year no mention is given of the rate reduction for certain goods from 13.5% to 9.0%. This could explain up to half of the drop in monthly VAT revenue seen in September as this measure was expected to cost €120 million in 2011.
A similar pattern emerges if we look at tax revenues in the third quarter.
Take out the effects of the reclassification (Income Tax) and the Pension Levy (Stamp Duty) and it is hard to see how these tax returns are “good news”. Also remember that any bump in tax revenue as a result of the Pension Levy will be offset by the expenditure increases also announced in the “Jobs Initiative” which was ‘budgetary neutral’.
In fact it was expected that the Pension Levy would raise €470 million; €457 million was collected. What odds that the expenditure measures will be over budget?
Coverage of the Exchequer Returns seems to give inordinate attention to whether tax revenue is “on target”. The 2011 revenue targets were released by the Department of Finance back in February and have not been updated since.
Tax revenue is €160 million ahead of forecast, but this forecast was made before the government expected to collect €470 million from a 0.6% levy on private pension funds. With other changes announced in the “Jobs Initiative” it is likely that by September tax revenue should be around €300 million greater than was forecast in February. If this is included tax revenue is actually “below profile”. This is clear if we look at the profiles of the individual tax headings.
The only significant increases are for Income Tax and Stamp Duty. Stamp Duty is €384 million ahead of profile but this does not account for the €457 million collected from the Pension Levy – Stamp Duty revenues are below forecast levels.
Income Tax is ahead of profile but this is primarily because of timing issues due to DIRT and this is helpfully explained in the Department’s Information Note:
Income tax is €147 million (1.6%) above target. Excluding the beneficial impact of earlier than expected DIRT payments in April and July, which were originally profiled for collection in October, income tax is just 0.9% below target after nine months of the year. Given the very large target set in the Budget and the introduction of such significant revenue raising measures, this is an encouraging performance.
The last sentence is staggering. It is “encouraging” that Income Tax revenue is “just 0.9% below target”. The author of the note is definitely one who believes that the class is half full.
Aside from April and July which had bumps due to DIRT receipts, monthly tax revenues have been below the DoF forecasts for seven of the nine months so far this year. Incredibly, tax revenue for September was €44 million below target even though €457 million of Stamp Duty was not included when the forecast was made. What did they miss? Almost everything.
In September three-quarters of the tax heads came in below forecast. Stamp Duty was up €256 million but this was only because €457 million was collected in a Pension Levy which did not exist when the forecast was made. In reality Stamp Duty on the original levies was more than €200 million lower than the forecast revenue of €360 million. The only "good news” in the September figures relative to the D0F forecast was that €16 million more was collected in Income Tax. Everything else was in the red.
If we exclude the €1.2 billion added to tax revenue because of the reclassification of the Health Levy into the Universal Social Charge and the €0.5 billion collected as part of the Pension Levy then it is likely that tax revenue is running pretty close to last year’s levels even with the revenue raising measures introduced in last December’s budget. It is also likely that tax revenue is running below forecast if the forecasts had been updated for the tax changes introduced in May’s “Jobs Initiative”.
At best I would consider these a fair set of Exchequer Returns. Tax revenue appears to have flattened out but “good news” based on tax buoyancy remains absent.Tweet