ANALYSIS:A recovery will set this year's budget broadly on target, but if it does not materialise we are in a whole new ball game, writes PAT McARDLE

THE EXCHEQUER returns usually issue on the second working day after the end of the quarter.

Yesterday, the Department of Finance broke with tradition and released them at 2.30pm on Good Friday, perilously close to the 3pm religious deadline. John Charles McQuaid must be turning in his grave.

When I joined the department in the late 1960s, the press conference took place at 7pm on the last working day of the quarter.

The minister was Charles J Haughey and the secretary general was T K Whitaker – nowadays they would be known as Charlie and Ken.

This was a pre-computer era and the numerous ledgers were maintained by hand. On the evening in question, a frantic balancing of the books took place after the banks closed.

The whole situation was fraught because Haughey did not welcome delays and the boss did not tolerate mistakes. We quickly became numerically proficient in a way that today’s school-leavers can only dream of.

Subsequently, the department moved to the arrangement that existed until yesterday and to which they will no doubt return once Easter is out of the way. The bottom line is that productivity is still less than it was in the good old days.

At first glance, the returns are a mixed bag. Tax revenues undershot by €266 million but spending was behind profile by an even larger €314 million and the exchequer borrowing requirement (EBR) was a moderate looking €3.9 billion (see table).

This prompted Minister for Finance Brian Lenihan to say the figures were generally in line with expectations and to leave the estimate for the 2010 EBR unchanged at €18.8 billion. This was better news than might have been expected given the weakness of the economy in recent times.

The current and capital spending shortfalls essentially reflect timing issues which should be made good as the year progresses. It is too early to call but a betting man would have a small wager that capital spending might again come in below budget.

Debt interest, too, is below target but the National Treasury Management Agency (NTMA) has a history of erring on the cautious side and the spreads are moving in our favour. Overall, it is likely that there will be savings of a few hundred million this year.

Relevant in this regard is the fact that the recent National Asset Management Agency (Nama) announcements added nothing to this year’s borrowing requirement. This is because Nama is a separate off-balance sheet operation designed to be self-financing, with the loans it buys from the banks being paid for by bonds issued by it, effectively IOUs.

The capital needs of Allied Irish Banks and Bank of Ireland will not impact much on the exchequer, unlike Anglo Irish Bank and Irish Nationwide Building Society, which will need very substantial funds but the drawdowns will be spread over a 10 to 15-year period, starting next year.

The upshot is that there is no immediate impact on the 2010 EBR, a point that got lost in the turmoil following the recent announcement.

This brings us to the revenue side of the equation. The simple approach would be to multiply the first-quarter shortfall by four to get a full-year undershoot of €1.1 billion.

The department noted that €100 million of the first-quarter shortfall was corporation tax, which they discount. This is because only 7 per cent of the corporation tax estimate is collected in the first quarter and one big company payment can skew matters.

However, there is no getting away from the fact that both income tax and VAT are below target and this is a concern.

Many of the smaller tax heads have a minus sign also. If the pattern of the first quarter were to continue, it is likely that tax revenue would, in fact, undershoot by a billion over the year as a whole.

Like most economic forecasters, the department has allowed for a gradual improvement as the year progresses. The reality may be better or worse than the trajectory they have assumed.

Recent straws in the wind such as new car sales and the Manufacturing Purchasing Managers’ Index for March point to an early improvement.

However, more important information on activity in the services and export sectors will need to confirm this. At this stage the Minister is probably wise not to publish any revisions. Everything hinges on the forecast recovery. If it materialises this year’s budget will be broadly on target. If it does not materialise, we are in a whole new ball game.

Finally, the returns confirm that the NTMA raised just over €10 billion from bond sales, or half the full-year requirement. This is a real achievement and the latest Nama announcement is getting a positive reception abroad which can only help.

About €0.75 billion was used to pay down short-term debt, leaving €9.25 billion available to the exchequer.

The EBR absorbed €3.9 billion and the remaining €5.3 billion went to top up surplus balances or rainy day money already in the exchequer.