The Government accounts for 2004 make pleasant reading. Instead of having to borrow an estimated €2.8 billion to cover a shortfall in revenue, the Exchequer ended the year with a modest surplus of €33 million.
Three factors are credited for this turnaround. The first is the €670 million raised in extra income tax as a result of the Revenue Commissioners' investigation of bogus non-resident accounts and off-shore assets.
The second is much stronger than expected revenues from stamp duty, capital gains tax and VAT, which came in almost €1.5 billion ahead of target. The exceptional buoyancy of the housing and construction market lies behind this unexpected surge in revenue. The final factor at play was significant underspending by Government Departments. Overall Government spending rose by 5.9 per cent rather than an estimated 7 per cent.
If these factors are stripped out, the underlying position is significantly less rosy but by no means a cause for concern. The Exchequer deficit of over €2 billion that is inferred is not inappropriate for an economy recovering solidly after a number of difficult years.
But the nature of the surplus does flag a number of issues which will have a bearing on the economy in the coming year. The most important of these is the resilience of the housing and construction market. In its recent Winter Bulletin the Economic and Social Research Institute concluded that house building alone contributed 1 percentage point to growth last year and will play a similar role this year. But the ESRI has warned that this level of house building is not sustainable and must taper off in the coming years, with obvious consequences for the economy and the Exchequer.
Another issue camouflaged to a certain extent by the surplus is the modest performance of income tax receipts despite high levels of job creation in 2004. Employment growth was 2.6 per cent last year, with 44,000 new jobs created, but it is expected to moderate to 2 per cent this year as the economy reaches full employment. The robust nature of the jobs market was underscored by the notified redundancy figures also released yesterday which show redundancies down sharply last month and around 16 per cent for the year as whole.
When the €670 million that flowed from special investigations is discounted, income tax receipts came in pretty much on target. However, they could have been expected to beat the forecast due to stronger than predicted employment growth. The Department of Finance has pointed out that many of the jobs created were relatively low paid and would not necessarily produce significant income tax revenues. In addition, the full year impact of the jobs created in 2004 will only become apparent in 2005. But the failure of increased employment to show up in the form of increased income tax revenues is worrying.
These are important caveats, but even when they are taken into account the Exchequer faces into 2005 with a fair wind behind it.