The pattern has been familiar over the past few years. The annual targets for the public finances have been beaten and the deficit – the gap between revenue and spending – has fallen year on year.
This in turn has helped the State raise new borrowing on the markets at cheap interest rates, as those lending it money are encouraged by the improving public finances.
This trend is continuing, and indeed the National Treasury Management Agency raised a further €4 billion in fresh borrowings on Wednesday, the day when the final exchequer figures for the year were announced.
Raising these borrowings at 1.7 per cent is a strong start to the year for the agency, and its decisions to raise so much so early may be wise at a time when long-term interest rates are creeping up.
The exchequer figures showed a deficit of just over €1 billion for the year, and the Government should easily undershoot its EU target of borrowing of 1.2 per cent of GDP. The estimated outturn was revised down to 0.9 per cent of GDP in the October budget – and stockbroking forecasters now expect a final figure of 0.6-0.7 per cent.
This puts the Government in a strong position heading into 2017, and should underpin the budget forecasts for this year.
Volatile tax
That said, significant uncertainty faces the economy this year, as Brexit talks and the Trump presidency commence, and tax trends are directly reliant on overall growth. We have seen before how volatile tax can be when economic growth collapses – remarkably, it was only last year that total tax revenue exceeded its pre-crash 2007 levels.
The underlying picture last year was solid enough, with tax revenues coming in 5 per cent ahead of 2015 and 1.4per cent ahead of expectations.
Income tax, in particular, finished the year strongly thanks to the self-employed returns after a bit of an autumn wobble. Spending remains broadly under control, though we are all aware of the pressures in health, pay and housing.
However,while the overall tax trends were solid, last year’s overpeformance was based on a stellar performance by corporation tax. It came in €737 million ahead of expectations. Given that total taxes came in €639 million ahead of target, the reliance on corporation taxes in terms of the outperformance is clear.
The Government says it is confident that this corporation tax performance is sustainable, and it may be. But any wobble on corporation tax – arising from the policies of president-elect Donald Trump, for example – would quickly take the shine off the tax figures.There are big numbers involved and a small number of companies. (One company received a €150 million refund in December.)
VAT returns
The main area of disappointment in the tax data was in VAT, where returns were 3.4 per cent behind target. Though 4 per cent ahead of 2015 levels, a much greater rate of growth had been anticipated. Close attention will be paid to the January VAT returns, which will reflect consumer spending over the Christmas period.
Economic growth is expected to slow this year. Provided GDP growth comes in around the Government target level of 3.5 per cent – down from an estimated 4.2 per cent in2016 – the exchequer figures should remain fine. The danger would come if external factors throw growth off course, or there is some wobble in corporation tax.
