Corporation Tax motors along - even if the state-aid payments muddy the waters

Corporation Tax revenues continue to motor though with some minor bumps in the road.  An issue in recent months is that the underlying changes have been clouded by the transfer of funds linked to the CJEU finding in the Apple State-Aid case.   For example, at first glance October’s receipts appear to have been very strong soaring ahead of the previous peak from 2022.

However, it has been suggested that around €3 billion of October’s CT receipts were transfers from the Apple escrow account and are one-off in nature. Taking these out presents a somewhat different picture:

Now it is clear that the underlying receipts in October this year were well down on their 2022 peak.  In and of itself this is not a major cause for concern.  There is no overall trend in October’s receipts with volatility the main feature. Even if lower than recent years, October 2024 was significantly higher than October 2020.

October would not typically have been considered a key month for CT receipts.  Large companies make the bulk of their payments in month 5 and month 11 of their financial year. October is month 11 for companies with a November year-end.

This is not a common financial year so the changes are linked to a small number of companies, probably one.  A manufacturer of COVID vaccines which has seen its profit drop substantially since 2022 would fit the bill.  This is a useful illustration of the concentration of Ireland’s CT revenues.

November is a key month for CT – being month 11 for companies with the much more typical December year-end.  We previously looked at what might be expected in November with the June receipts (month 5) and by and large receipts were broadly in line with the expectations set out there.

Again, though, there is the muddying of the underlying picture due to the Apple transfers. In total, November’s CT receipts were an incredible €13.7 billion.  Of those, it has been suggested that around €6 billion is due to the state-aid case. It would be helpful if more precise figures were provided but this does not seem to be case.

Anyway, here are the monthly receipts for November (less the state-aid money in 2024).

The picture is pretty clear: onward ever upward.  Back in July, we projected that €8.2 billion would be collected in November and, though we don’t have the precise figure, it looks like the outturn was maybe €0.5 billion or so below that.  Incredibly, we are at the stage where that would be considered a “small” error.

Even with the softening of October’s receipts and November seemingly coming in a little below what might have been expected, 2024 is on track to be another record year for CT.  With a month to go, the €26 billion collected so far (excluding the money linked to the Apple case), is already well up on what was seen in last couple of years.

Indeed, the near €8 billion collected in November alone is almost double the €4.2 billion that was collected in the entire year in 2013. 

A few months ago, it seemed 2024 was on track to get close to €30 billion.  This won’t be achieved. December is not typically a major month for CT, but the monthly receipts in recent years have been not far off €2 billion.

If December 2024, brings in €2 billion then 2024 will see CT revenues of €28 billion or thereabouts.  The amounts are enormous.

Perhaps we will get away without having to extend the scale of the vertical axis on the chart of the rolling 12-month sum of CT receipts. 

We might get away with it in December, but if the trends are anything to go by another revision to the scale will be necessary sometime in 2025.

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CT receipts go gangbusters - again

Can we really keep saying that? We might have expected an increase in June but the outturn was exceptionally strong.  For a single month, the €5.9 billion collected in June is second only to the €6.3 billion collected last November.  

As shown below, June 2024 was by far the largest June on record.

Of course, as we discussed earlier, the June receipts are also a pointer to what might happen in November.  Here’s what happens if we extend the June/November relationship for the outturn we have just seen for June 2024: a fitted value for November 2024 of €8.2 billion – which alone would be equivalent to the entire amount of CT collected in 2017.

The strong June means that 2024 is now considerably higher than 2023.  In the first six months of 2024 €12.2 billion of CT has been collected.  On its own this would be the fourth-highest full year ever – and there are still six months to go.

It is pretty likely now that the sequence of calendar year CT receipts exceeding the previous year will be extended to 13 years (back to 2012).

The June outturn was enough to push the rolling 12-month sum up to a new high of €25.5 billion.

The next month of interest will be August when we will see how much the fruit harvest brings in.

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Some other trends in government revenue

The last post looked at the question as to whether the slow down in the growth of Exchequer tax revenue is reflective of underlying trends in the economy.  The conclusion was that while there has been a slow down in the growth of tax revenue it is due to factors that do not reflect underlying trends in the economy such as the 2015 level-shift in Corporation tax, the 2016 spike in Excise Duty and €2.2 billion of revenue reducing measures over the past three budgets.  Any concerns about the slowdown in tax revenue growth should be limited to the impact on the public finances rather than what it might imply for the economy in general.

Of course, Exchequer tax revenue isn’t the only source of government revenue though for a variety of reasons it attracts the most attention.  A broader measure of government revenue would include PRSI, other appropriations in aid collected by government departments and Exchequer non-tax revenue such as the Central Bank surplus, semi-state dividends, capital resources and income related to banking measures such guarantee fees and interest and dividends from certain banking assets.  So what is happening to these?

We have a divergent picture.  PRSI receipts have been growing steadily and in June recorded growth on a 12-month basis of 8.4 per cent.  For the year-to-date PRSI is 2.5 per cent or €116 million above profile in contrast to Income Tax which is €214 million behind profile.

The sum of Exchequer non-tax revenue and other appropriations-in-aid has been declining since the final quarter of 2014.  In November 2014, the 12-month sum of these revenues was €7.5 billion while for June 2017 the total was €5.0 billion.

This is due to falls in most of the items that are included in the category.  The surplus from the Central Bank with a general government impact was €1.4 billion in 2014 but was less than €1 billion this year.  €420 million of bank guarantee fees were collected in the year to January 2014 while the current total is less than one-tenth of that.  Around €500 million of dividends were collected by the Exchequer in both 2014 and 2015, last year it was less than €200 million.  Capital resources were boosted in 2014 by the €335 million received from the sale of Aer Lingus shares.  Other appropriations-in-aid have fallen from €4 billion to €3 billion though it is not clear why this is so or how it is linked to the expenditure of those departments.

The takeout is that while Exchequer tax revenue and PRSI receipts are growing, Exchequer non-tax revenue is falling.  This is a not surprise though.  Exchequer non-tax revenue to the end of June was €1,309 million compared to a profiled amount of €1,310 million.  Other appropriations-in-aid are also down year-on-year but are in line with expectations.

An issue may be when the growth rate of net expenditure is compared to the growth rate of taxation when it is known that non-tax sources of revenue are falling.  Using broader measures of central government revenue and expenditure may capture more information.

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Should we be concerned with the slowdown in tax revenue growth?

Exchequer tax revenue bottomed out in the middle of 2010 and has been on a fairly steady upward trend since then.

There has, however, been a bit of attention given to the “flattening out” that has occurred since the middle of 2016.  This is more apparent if we look at the annual changes in the moving sum depicted in the chart above:

Here we can see that tax revenues recorded their fastest recent growth in early 2015 (13.6 per cent in February) and while it was still above 10 per cent in mid-2016 there has been a steep fall in the growth rate since then with growth down to 3.5 per cent in May 2017.  Should we be concerned about this fall in the growth rate of tax revenues?

There are three reasons that can serve to ameliorate our concerns:

1. The level shift in Corporation Tax receipts in 2015,
2. A spike in Excise Duty receipts in early 2016,
3. The impact of €2.2 billion of revenue-reducing budgetary measures (of which €1.8 billion relate to Income Tax)

Corporation Tax revenues began to rise in the middle of 2014 but really ramped up in the second half of 2015. 

A level-shift from €4 billion to €7 billion occurred in a very short period of time and for the past 18 months or so receipts have been relatively stable at the new level.  This will obviously have had a dramatic impact on the annual growth rates.   The growth of Corporation Tax exceeded 50 per cent towards the end of 2015 and was still above 40 per cent in June 2016.  Since then the growth of Corporation Tax has fallen markedly as the rise to the new level washes out of the annual growth rates.

The other tax exhibiting a strange recent pattern is Excise Duty.  If we truncate the vertical axis we can highlight this.

Excise duties rose unexpectedly in early 2016 and have returned to somewhere near where they might have been had the steady upward trend seen since the middle of 2013 continued at the same rate.  The reason given for the spike is that excise duty from cigarettes increased markedly in advance of the expected introduction of plain packaging legislation.  The pattern for new car sales will also have contributed to the Excise Duty outturn.  The nature of the spike in early 2016 means that the annual changes in Excise Duty have turned negative.

Here are the annual changes in 12-month rolling sums of Corporation Tax and Excise Duty receipts:

What we see is that the growth rate of both have been falling since the middle of 2016 though obviously much more markedly in the case of Corporation Tax.  It is likely that these are driving the similar trend we see in overall Exchequer Tax receipts.  So let’s look at the growth of Exchequer tax revenue excluding these Corporation Tax and Excise Duty (notwithstanding that they are two of the big four ‘tax heads’):

The navy line is the pattern that has caused some recent concern.  The maroon line is the annual change excluding Corporation Tax and Excise Duty, and while this did fall during 2015 it has been relatively stable for the past 18 months or so, generally showing growth of between four and six per cent.  All the recent slowdown in the growth of Exchequer Tax revenue is due to Corporation Tax and Excise Duty.  Are the 2015 level-shift in Corporation Tax and the 2016 spike in Excise Duty reflective of underlying trends in the economy?

One tax that may reflect the underlying trends of the economy is Income Tax and this appears to have flat lined recently.  This was growing at between eight and ten per cent through 2015 and up to the end of 2016 but the improvement slowed in 2017 to less than half that amount.  The latest Fiscal Monitor shows that Income Tax to the end of May is only up 2.5 per cent on the same period of 2016.

One reason not to be concerned with this is that around €1.8 billion of measures reducing Income Tax were introduced across Budgets 2015, 2016 and 2017, of which the bulk related to the Universal Social Charge.  One way to assess this could be to compare the growth rate of PRSI (which hasn’t had significant policy changes from a revenue perspective in recent budgets) to the growth rate of Income Tax (which has). 

We see a large gap opening up in the past six months or so.  PRSI receipts have grown between eight and nine per cent year-on-year.  Income Tax revenues were growing at close to that level up to late last year but the growth has fallen to around three per cent now.  If this drop was reflective of underlying trends in the economy we could expect both Income Tax and PRSI to be similarly affected. 

The fact that they are not points to something else and the eight per cent growth of PRSI receipts reflects the underlying strong growth in the economy.  And in replying to a PQ the former Minister for Finance indicated that the PAYE component of Income Tax was up eight per cent in the first third of the year compared to the same period of 2016.  Again, this is in line with what we see in the labour market.

On the other side, VAT seems to be growing a little stronger than the underlying trends in the economy would suggest.  It might be something we come back to. As shown below, the growth of VAT on a rolling 12-month basis jumped at the start of 2017 and is now growing at nearly ten per cent.  Although seemingly positive maybe this is the one we should be concerned about.

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The (slow) improvement in the Public Finances

Figures from the Exchequer Statements show that the Exchequer Balance has improved in each of the past four years.

However, for the years to 2013 this was because of improvements in “one-off” items in the capital account: large recapitalisation payments in 2011 moving to some (much smaller) asset sale receipts in 2013.

Last year, however, marked the first year where there was a clear improvement in the current account.  These are the regular and ongoing receipts and expenditures from the Exchequer Account.

We will have to move to a current account surplus but there was little or no progress on that until 2014.  And most of this was achieved through higher tax revenues.

Since 2011, tax revenues have increased by around €7 billion.  Over the same period the Exchequer Current Deficit has improved by €6 billion. There is still a bit to go (and early indications that the improvement has continued in 2015).

It should be noted that the Exchequer Account has become much more dependent on Non-Tax Revenue in the Current Account.

The composition of non-tax revenue is looked at here but it can be seen that it is now more than €2 billion greater than the pre-crisis levels seen in 2007.  A lot of this is down to banking support measures (central bank surplus, contingent notes interest, guarantee fees) and cannot be expected to last indefinitely.  These revenues will have to be replaced.

On the expenditure side, here’s a chart of net voted current expenditure.

On aggregate there doesn’t appear to be a lot happening there but voted current expenditure has been reduced from €41.4 billion in 2011 to €39.0 billion in 2014.

Offsetting this there have been increase in non-voted current expenditure – the main component of which is servicing the national debt. 

Debt interest expenditure rose rapidly in the years to 2013.  There was only a small rise in 2014 and the continuing low-interest environment allowing the refinancing of some debt at lower rates (such as the IMF loans) means that it is likely that debt interest expenditure will fall (but not by much) over the next few years.

By far the greatest change in the Exchequer Account during the crisis has been the huge scaling back of voted capital expenditure.  Since its peak in 2008 voted capital expenditure has been cut by more than 60 per cent.

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Exchequer Non-Tax Revenue

In the four years fr0m 2006 to 2009 non-tax current revenue received into the Exchequer Account was €2.9 billion.  In the four years to 2014 the amount received was €11.2 billion.  The main payments behind these changes are shown in the table below. Click to enlarge.

Dividends from semi-state enterprises have increased though the 2014 payment from the ESB was largely the result of asset sales which also were a factor in the Ervia dividend (holding company for Gas Networks Ireland and Irish Water). 

The largest increase has been for the Central Bank Surplus which is about €1 billion higher than it was seven or eight years ago.  This is a function of the various measures introduced as part of the rescue of the banking system.  Guarantee fees were significant from 2010 to 2013 but have dropped considerably with the closing of the ELG for new liabilities.

An obvious concern would be that some of these revenues are only temporary in nature and will need to replaced as they decline.

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Mid-Year Exchequer Returns

The end-June Exchequer Statement was released yesterday.  Here are the relevant documents.

• Exchequer Statement
• Analysis of Tax Receipts
• Analysis of Net Voted Expenditure
• Information Note
• Presentation Slides

The media reaction to the release has been glowing with examples of headlines being:

• RTE: Exchequer Returns ahead of target to end of June
• Irish Times: Latest Exchequer Returns €500 million ahead of target
• Irish Independent: Half year tax take €500 million ahead of expectations
• Irish Examiner: Exchequer figures better than expected
• Journal.ie: So far in 2012…tax take €500 million ahead of target

The Department of Finance are pretty upfront about all this and do provide all the necessary information required to explain why tax revenue is ahead of profile.  What is absent in all the media reports is any explanation as to why revenue is up. 

If this excess was completely unanticipated it would be a very positive development.  There have been a number of factors such as delayed Corporation Tax receipts and reclassified PRSI contributions that slightly complicate an analysis of the 2012 tax figures

Each year a monthly profile of tax revenue for the year is provided by the Department of Finance and the Tax Profile for 2012 that was published on the 10 February.  By the end of June it was expected that tax receipts would have accumulated to €16,025 million. 

As a result of a delay meaning that some 2011 Corporation Tax was actually paid into the Exchequer Account in 2012 and the reclassification of some PRSI receipts as Income Tax a revised profile was released in early May.  The updated figure was that €16,507 million of tax would be collected by June with the increase accounted for by the Corporation Tax and PRSI issues.

Just two months later we have learned that the actual amount of Exchequer tax revenue to the end of June is €17,014 million.  The difference is the €507 million excess referred to in the media.  However, given that the Department’s revised tax profile began in April it seems unusual that tax revenue for the next three months has come in €507 million ahead of target.  Or this is how it might appear.

In the original profile it was expected that €8,136 million would be collected between April and June.  In the revised profile the equivalent figure was actually slightly lower at €8,112 million.  The outturn shows that €8,293 million was actually collected between April and June. 

Tax revenue in the period since the new profile was released is €181 million ahead of target.  So how come it is being reported that tax revenue is €507 million ahead of profile?

To the end of March the actual amount of tax collected was €8,722 million.  As the March Exchequer Statement was released on the third of April we can assume that this fact was known when the revised tax profile was released a month later on the second of May.  This revision indicated that April was expected to see €2,059 million in tax collected.  Adding this forecast for April to the March outturn would give a cumulative forecast to the end of April of €10,781 million.  The revised profile actually has a figure of €10,430 million.

So the Department knew that €8,722 million had been collected by the end of March and expected that €2,059 million would be collected in April but included a figure of €10,430 million in the revised profile.  It seems that the revised profile was based on a cumulative figure to the end of March of €8,396 million rather than the €8,722 million that was known to be collected; a difference of €326 million.

Adding this to the €181 million that tax in the April-June period actually was ahead of profile gives the €507 million ‘excess’ reported today.  Of the excess €326 million was completely anticipated because it arises from using a figure at the start of the profile that is lower than reality.

This is not to say that tax revenue is not performing well; it is.  The budget had a 2012 forecast of €35,825 million (up on the €34,027 million collected in 2011).  Because of the corporation tax and PRSI issues this was revised up to €36,375 million.  The performance in the first six months of the year suggests that this can be achieved.  

In fact, using actual the March figure (€8,722 million) and the revised total for April to December (€28,005 million) means that the Department of Finance now expect tax revenue in 2012 to be €36,727 million.  This is a good performance but why not come and say that this is what they expect?

When the revised profile was released on May 2nd it seems reasonable to suggest that this would be based on the known figures at that time.  By May 2nd the March tax return was known (and the April figure was also released the same day).  Starting a profile that is €326 million below the known figure for March is a little odd but lowering the bar in this manner does mean we can expect to hear plenty of “tax revenue is ahead of target” for the next few months.   Tax revenue is rising but, at this stage, most of it is anticipated.. Tweet

Expenditure in the Exchequer Statements

We seem to spend an inordinate amount of time going through every possible representation of the tax revenue figures in the Exchequer Statements.  The latest post is a good example of this.   Why not devote even a fraction of this attention to the expenditure figures in the Exchequer Statements?

The answer of course is that the Exchequer Statements do not contain expenditure data that can be analysed in any meaningful fashion.  The appendix with the Analysis of Net Voted Expenditures shows that net voted expenditure was €45,711 million in 2011; in 2010 it was €721 million higher at €46,432 million.  What does this mean?

It is very hard to say.  Net voted expenditure is gross expenditure adjusted for departmental receipts (known as appropriations-in-aid).  If net expenditure changes it can be difficult to determine if this is as a result of expenditure changes or changes in departmental receipts.

This leads to statements like the following in the Information Note to this month’s Exchequer Statement:

The underspend on the Social Protection Vote was due to higher than expected PRSI receipts, which more than offset overspends on a number of schemes, including Jobseekers Allowance. 

Huh.  Spending is down because receipts are up.  Underspending and overspending in the same sentence.  All in all it is almost impossible to tell if spending is up or down.  There are changes and adjustments in the tax revenue figures but in general they are easier to track, and more information is presented, than those in the expenditure figures.

Note 4 in the Exchequer Statement indicates that expenditure in health has increased to €12,897 million from €11,578 million in 2010.  In the current era of austerity and expenditure cuts it seems unusual to suggest that expenditure in health increased by 11.4% in the last year.  Of course, this is nonsense but that is what the Exchequer Statement shows.

The reason for the change is the abolition of the Health Levy.  In 2010, the Health Levy was a departmental receipt for the Department of Health.  The receipts of €2,018 million were subtracted from gross expenditure to get the net expenditure figure for health reported in the Exchequer Statements.

Although net voted expenditure for health has risen we cannot use this to say that we are spending more money on health.  We don’t get monthly updates of actual (i.e. gross) expenditure in the Exchequer Statements but we can get the annual figures from the Databank provided by the Department of Public Expenditure and Reform. 

Gross expenditure in health fell from €15,169 million in 2010 to €14,316 million in 2011.  There was a 5.6% reduction in expenditure in health in 2011 but it is impossible to determine this from the monthly Exchequer Statements.  It would be extremely useful if the gross expenditure figures were also provided in the monthly Exchequer Returns. 

As it is the best we can do are annual tables like the following for the Health Group.

Reporting net expenditure figures as is done in the Exchequer Statement has no impact on the reported Exchequer balance but we do not see how the figure is reached.  Even if monthly gross expenditure figures were provided for every department there would still be difficulties due to the abolition and creation of some departments and changes in the functions and responsibilities of others.

Anyway, the conclusion is that expenditure in health fell in 2011, particularly non-pay expenditure of the HSE (-8.5%) and the Office of the Minister for Children (-45.3%) even if the Exchequer Statement is reporting an increase in “net” expenditure.  As a result of issues like this there is little value in spending much time exploring the expenditure figures in the Exchequer Statements.

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End of Year Tax Receipts

The Department of Finance have released the end of year Exchequer Statement for 2011.  The relevant documents are:

• Exchequer Statement
• Analysis of Tax Receipts
• Analysis of Net Voted Expenditure
• Information Note from the Department

Here we will have a look at the figures in the usual detail.  First up cumulative tax revenue by month.

Cumulative tax revenue has been ahead of the 2010 outturn for every month of the year.  The increase peaked in September at 8.7% (when the new pension levy was collected) and has eased since then to finish the year up €2.3 billion or 7.2%.  This has been hailed as the first rise in tax revenue in three years.

By looking at the individual tax heads we can see that virtually all of this increase is due to Income Tax.

The CSO reports that employment fell 46,000 in the year to September and that average weekly earnings rose 1.4% over the same period.  These do not seem like labour market indicators that support a 22.4% rise in Income Tax.  Budget 2011 contained a series of measures that were forecast to bring in about an extra €1 billion of Income Tax in 2011.  So where did the other €1.5 billion come from?

It came about as a result of the reclassification of the old Health Levy into the new Universal Social Charge.  The Health Levy was a departmental receipt collected by the Department of Health and did not appear in the Exchequer Account.  All money collected under the Universal Social Charge enters the Exchequer Account and is included under the Income Tax heading.

In 2010 the Health Levy raised €2,018 million.  This money was collected again in 2011 but under the guise of the Universal Social Charge in Income Tax receipts rather than as a receipt for the Department of Health.  There might have been an increase in tax revenue in the Exchequer Account but there was little or no increase in government revenue.

The other tax showing a strong increase on 2010 is Stamp Duty.  As we said when the September Exchequer Statement was released:

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.

VAT is down €360 million but about one-third of that is due to the reduction in the 13.5% to 9% for certain goods and services in the same Jobs Initiative.

On a monthly comparison every month was ahead of the 2010 equivalent bar one: the last one.  Tax revenue for December 2011 was €51 million lower than in December 2010.

If we look at the individual tax heads we can see the causes of this.

The standout figure is obviously the 96% drop in Corporation Tax receipts.  The Information Note offers an explanation for this:

[…] some €261 million in corporation tax receipts due for receipt in December were not received into the Exchequer account in time to be accounted for in 2011. The bulk of these receipts have since been received and will form part of the January 2012 tax revenue outturn.

It is not really clear what has happened but this will add a bit of new year ‘pep’ to the Exchequer Returns in 2012.

If we just look at the last quarter of 2011 the picture is a little more benign.

Apart from the continued weakness in VAT receipts and the glitch in Corporation Tax all tax heads in the final quarter of 2011 are ahead of their performance from 2010.  The 40% rises in Capital Gains and Capital Acquisitions Taxes are noteworthy, but the contribution of these taxes to total tax revenue remains small (just 5.8%).

No analysis of Tax Revenue is complete without investigating whether receipts are “on target” which were published last February.  They’re not.

Tax revenue in the final quarter of the year might be up on its 2010 performance but it is clear that the Department of Finance was expecting a much greater bounce.  Over the last three months of the year tax revenue went from being €160 million ahead of target to €873 million behind target.  If we omit the measures introduced in the Jobs Initiative that did not exist when these targets were set it is likely that tax revenue is around €1,200 million or 3.5% below target.

In each the last three months of the year tax revenue was more than €330 million behind the DoF forecast.  It was hoped that there would be a rise of €1,383 million to €10,962 million of tax receipts in the final quarter.  It is not clear why the DoF expected a 15% rise in tax revenue in the final quarter of the year but receipts were actually €9,929 million, almost 10% below target.

For the year as a whole three of the four main tax heads are significantly below their target and the overshoot in Excise Duty is a relatively inconsequential €3 million.

The tax to strongly outperform the target for it set last January is Stamp Duty and this is only because €457 million was collected from a 0.6% private sector pension levy that was only introduced in May.  On that basis of what was to be collected at the time the forecast was made Stamp Duty is also below target.

If we look at the last quarter of the year when it all went wrong.

There is some cover for the almost 25% underperformance of Corporation Tax, but even if the €261 million of delayed receipts are added in Corporation Tax receipts would still be 10.8% behind the target for the quarter.  The largest taxes for the quarter were forecast to be Income Tax and VAT and these were both almost 10% below target.

To be fair the performance in December was slightly better. 

Although there is plenty of red in the table most of the shortfall is due to the Corporation Tax issue.  There is no such explanation for the large undershooting of tax receipts in October and November that is reflected in the quarterly table above.

For 2012 the Department are forecasting a 5.3% increase in tax revenue.

This is largely based on a €1.2 billion increase in Income Tax receipts during the year.  Budget 2012 contained no Income Tax measures so this €1.2 billion increase will have to be the result of the carryover from the measures introduced in the 2011 Budget (estimated at €600 million) and a general upturn in Income Tax receipts (accounting for the remaining €600 million).  I can’t say that I can see that coming down the track.

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Tax returns flatter to deceive

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.

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