Analysis: Growth in tax take of 9.2% in first half masks large disparities, writes Colin Hunt.

The Exchequer returns for the first six months of 2003 brought the proverbial curate's egg to mind. While the Minister for Finance can draw comfort from the re-imposition of control over spending growth, the means employed to achieve that end and developments on the taxation side of the budgetary accounts give cause for concern.

Mr McCreevy will doubtless be pleased that spending growth in the first six months has been restricted to a modest 6.1 per cent, which is actually below his full year budgeted increase of 6.7 per cent.

The massive spending overruns that characterised the 2000-2002 period appear to be a thing of the past and the Minister is now well-placed to deliver spending on target this year.

Clearly, the spending departments are feeling the pressure from the Department of Finance to manage their allotted monies carefully and are behaving themselves accordingly.

Lest any department believe that the expenditure corset may be relaxed in the second half of the year, Mr McCreevy issued a statement declaring that his Department would continue to monitor spending closely.

The return to prudential resource management is to be welcomed and spending growth at an aggregate level has now been reduced to a rate that should prove sustainable over the medium term.

The scale of the accomplishment on this front is best highlighted by reminding ourselves of the performance in the first six months of 2002, when spending growth topped 22 per cent in the pre-election bonanza.

While Mr McCreevy deserves credit for returning spending growth to a sensible and broadly sustainable clip, he has chosen the softer option of restraint on the capital expenditure side.

Given Ireland's yawning infrastructure deficit and the emergence of some spare capacity in the construction industry, policymakers should now be seeking to boost capital spending.

However, the Exchequer returns reveal that the amount of funds allocated to capital expenditure actually fell by 13.6 per cent compared with the same period in 2002.

While we expect to see capital spending growth recovering in the second half of the year, there is a risk that the full year out-turn may undershoot the fall of 1.4 per cent that had been planned for this year.

Contrasting with the experience on the capital side, voted current spending growth stood at 9.6 per cent in the first six months against a targeted increase of 8.6 per cent.

This growth rate only takes partial account of the first phase of benchmarking payments, which will begin to really make their presence felt in the July returns.

With public sector pay increases eating into the limited resources available to Mr McCreevy, we should expect non-pay spending on the day-to-day running of the State to remain under pressure.

Overall tax revenue in the first six months was 9.2 per cent higher than the same period in 2002. Once again, however, timing distortions were at play and the headline rate overstates the true level of revenue buoyancy.

Moreover, the apparently impressive growth rate disguises substantial disparities across the various tax headings. The most spectacular revenue growth is being enjoyed by stamp duty, with receipts under this heading increasing by 50 per cent, which clearly is reflective of the strength of the housing market.

At the opposite end of the revenue spectrum, income tax receipts are down by 7.3 per cent, which suggests that labour market conditions remain sluggish.

However, rather than reflecting falling employment, the revenue disappointment is a result of fewer overtime opportunities, lower bonuses and the impact of SSIA payments, which are treated as negative receipts rather than expenditure items.

Despite the strength of stamp duty and a solid increase of 10.6 per cent in VAT receipts, the Department of Finance now believes that revenue may fall short of target by up to €500 million at year end.

In the absence of a pleasant surprise on the economic growth front, the upcoming Estimates season will not be an enjoyable experience for the spending ministers.

Budget 2004 is already shaping up to be a repeat of last December's delicate mix of spending restraint and stealthy tax increases.

Colin Hunt is research director at Goodbody Stockbrokers