Permanent expenditure with temporary tax?

Here is the progression of estimates of 2015 Gross Voted Current Voted Expenditure over the past year or so:

• Revised Estimates (December 2014): €49,612 million
• Stability Programme Update (April 2015): €49,715 million
• White Paper (October 2015): €51,040 million

Gross Voted Current Expenditure for 2015 is set to be around €1.4 billion higher than set out in the Revised Estimates published last December.  This is due to Supplemental Estimates that are due to be introduced for various departments in 2015.

The scope to do this was afforded by the over-performance in tax revenue this year which meant that expenditure could be increased while still staying comfortably inside the 2.9% of GDP deficit limit set under Ireland’s on-going Excessive Deficit Procedure.

However, almost all of the tax over-performance is due to Corporation Tax.  If we look at vintages of projections for 2015 Corporation Tax receipts we have

• Budget 2015 (October 2014): €4,575 million
• White Paper (October 2015): €6,130 million

Corporation Tax receipts for 2015 are now expected to be €1.6 billion greater than expected at the time of the budget last year with around €6 billion now expected based on the trend that has been seen so far this year.  It is this extra revenue that has allowed the Supplemental Estimates for 2015 be introduced.

A 33 per cent rise in Corporation Tax is significant.  The Information Notes with the monthly Exchequer Statements have attributed it to “improved trading conditions”.  This was expanded on in today’s budget documents:

All of the major taxes are significantly up in year-on-year terms and ahead of, or broadly in line with, profiled receipts. Of particular note is the very strong performance of corporation tax, which is up €1,209 million on profile at end-September; this is primarily due to improved trading conditions, principally amongst the multinational sector.

Given that 80 per cent of Corporation Tax between 2008 and 2012 was paid by foreign-owned companies it is not a surprise that the extra tax revenue this year is coming from the same sector.  On the difficulties in forecasting Corporation Tax revenues based on relationships that can evolve over time the following is noted:

This is particularly relevant given the performance of corporation tax through the first nine months of 2015, which is up 45 per cent year-on-year, and the fact that over 40 per cent of corporation tax receipts are due in October/November. Given that the May/June receipts earlier this year include the preliminary payment for 2015, the 2015 forecast assumes a continuation of the year-on-year growth. However, given the concentration risks in corporation tax, with the top 10 taxpayers accounting for about a third of overall revenue, this tax head is subject to greater swings than most.

The performance of Corporation Tax in 2015 is surprising but is it permanent? It has been used to finance increases in current expenditure this year but these become “baked in” to the figures for future years.  If the €2 billion increase in Corporation Tax expected this year is permanent then there are unlikely to be difficulties but if this increase is transitory then the permanent expenditure increases will have to be funded from elsewhere. 

Also when the tax data from the Revenue Commissioners with these increased Corporation Tax payments becomes available what impact will this have on the CSO’s GDP estimates? €2 billion of extra Corporation Tax could conceivably be related to an extra €20 billion of Gross Operating Surplus (assuming the extra Corporation Tax is on increased trading profits though CGT paid by companies is also a possibility). 

And this is, apparently, before any of the implications on the national accounts that could flow from an adverse finding by the European Commission in the Apple State Aid case.  Consider the revisions if Apple’s ex-US profits are to be added to our GDP! [though the ECJ are highly likely to overturn any such finding].