Better than expected March exchequer returns beg the question whether the underlying economy is more robust than we had previously thought or has Finance Minister Michael Noonan merely been lucky?
Does the fact that first quarter VAT receipts surpassed the budget day target, illustrate that our underlying economy is stronger than the official statistics suggest?
Finance Minister Michael Noonan’s decision to increase the standard VAT rate by a further 2% to 23% in his December 2012 budget was greeted with dismay by the hard-pressed retail sector. With the value of retail sales having already fallen by a quarter from its 2007 peak, it was widely feared that the VAT hike would prove the final straw for many retailers.
Since the budget, all of the official economic data has painted a picture of an economy mired in deep recession. According to the CSO, the Irish domestic economy as measured by GNP fell by a further 2.5% in 2011. This brings the total contraction in the Irish economy since 2007 to 18%. Not so much a recession as a full-blown depression.
The CSO’s retail sales figures paint an equally grim picture. The February retail sales figures, which largely reflect transactions that took place in January, revealed that the value of retail sales was 1.8% lower than it had been 12 months earlier. Even when motor sales, a notoriously volatile category, are excluded the value of retail was still 1.7% lower. These latest falls in the value of retail sales bring the total reduction since 2007 to 25% when motor sales are included and to over 18% when they are excluded.
A bloodbath in retail land
The bad news from the retail sector was further reinforced when long-standing electrical retailer Peats, which had 11 stores in the greater Dublin area, announced on 3 April that it was appointing a liquidator and closing its doors with immediate effect.
Peats was merely the latest retail casualty of 2012. It shut up shop only days after UK computer games retailer Game went into administration and closed its 14 Irish shops. Quite clearly it’s a bloodbath out there in retailing land.
With the official statistics showing a further decline in sales and the retail casualty list continuing to mount, all eyes were on the March exchequer returns, which would show how much the government had collected in tax revenue, including VAT, for the first three months of 2012. Given what we already knew the omens were not good.
Fiscal Advisory Council
Further adding to the gloom was the publication of the Fiscal Advisory Council’s latest assessment report. By coincidence, the council, which was set up last year to help advise the government on budgetary policy, published its assessment only a few hours before the release of the March exchequer returns.
The Fiscal Advisory Council painted an extremely pessimistic picture of the budgetary situation. Pointing out that most bodies have slashed their Irish economic growth forecasts for 2012 and the following years, it urged the government to tighten the fiscal screws even further than it had already planned to do so.
Under the terms of the deal agreed with the EU/ECB/IMF troika, the Irish government is committed to a further €12.4bn of tax increases and public spending cuts between now and 2015. If the Fiscal Advisory Council has its way that will increase by a further €2.8bn to €15bn; basically the equivalent of another hairshirt budget on top of the three already planned for the next three years.
With the economy shrinking, retail sales falling and the fiscal flagellants of the Fiscal Advisory Council urging that the government inflict even further punishment on the Irish economy, virtually everyone outside the Department of Finance looked forward to the publication of the March exchequer returns with a certain trepidation.
Exchequer returns
However, even in advance of the publication of the exchequer returns, Finance Minister Michael Noonan refused to indulge in the almost universal gloom. Of course it helped that he had succeeded in persuading the EU and the ECB to approve the issuing of a long-term Irish government bond rather than forcing us to hand over €3.1bn in cash to repay the latest tranche of the Anglo promissory notes which fell due for repayment at the end of March.
With “sources close” to Mr Noonan holding out the possibility of a comprehensive deal on the Anglo promissory notes by mid-May and a deal on the Irish-owned banks loss-making tracker mortgages also in the offing, the Minister for Finance is clearly hoping that a resolution of the thorny issue of Irish bank debt – bailing out the banks has already cost the Irish state E864bn and its solvency – will transform the prospects for the Irish economy.
The March exchequer returns certainly provided the Minister with some grounds for optimism. With the exception of excise duties, which were 4% lower than the budget day target, revenues from all of the other major taxes, income tax, VAT and corporation tax, were well ahead of target for the first three months of the year.
VAT gamble paying off?
And it wasn’t just the spillover effect from December 2011. March tax revenue was 5.7% ahead of the budget day target with VAT revenues for the month being more than 10% ahead of target. Quite clearly, in the short-term at least, Michael Noonan’s gamble of raising VAT has paid off big time.
Which of course raises the obvious question: how does the higher tax revenue, from VAT in particular, tally with other data showing a shrinking economy? Is the other official data incorrect or was the increased tax revenue recorded in the March exchequer returns the result of an as yet unexplained short-term “blip”?
Is the underlying economy more robust than we had previously thought or has Michael Noonan merely been lucky? If so when will that luck wear off?
Until we have a better understanding of what lay behind the better-than-expected March exchequer returns we would do well to err on the side of caution. While we should all hope that the increased tax revenues are a sign of better times ahead, we should be prepared for a sharp slowdown in revenues some time over the next few months.
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