Any lingering doubt about a slowing economy has been dispelled by the latest set of exchequer figures which outline Government spending and revenue in the eight months since January. The returns show economic growth decelerating, and tax receipts failing to match revenue forecasts as the outlook in the property market deteriorates.
As house prices fall and sales decline, tax receipts, consequently, are suffering. The revenues from stamp duty, capital gains tax and VAT are all failing to meet the overly ambitious targets set last December on budget day. And in the months ahead little improvement is likely.
On the basis of the latest exchequer figures, some economists are now tentatively predicting a €1 billion revenue shortfall by the end of the year. That would represent a very major turnaround on the remarkable revenue outturn in 2006. But that only serves to underline a worrying feature of recent years: the inability of the Department of Finance to forecast revenue receipts with an acceptable degree of accuracy, and within a tolerable margin of error. Last year, the department managed to underestimate revenue by close to €4 billion, while in previous years (2004 and 2005) it was also well off target when calculating likely tax receipts. This poor forecasting record reflects a sustained failure to estimate revenues from property-related taxes, such as stamp duty, CGT and VAT.
The Department, however, having greatly underestimated revenue receipts during three years of a buoyant property market, last December changed its view. Unfortunately, it did so at just the wrong time. Past pessimism about revenue receipts was replaced by, as these Exchequer figures confirm, over-optimism about tax buoyancy in 2007. If, on the revenue side, the Department of Finance has managed to underestimate the boom, it has now underestimated the downturn, notably the impact of the property slowdown on tax receipts.
This overestimate of tax revenue now changes the financial arithmetic, and sets the Minister for Finance, Brian Cowen, a far more challenging task as he prepares to introduce his budget in December. For, unlike previous years, Mr Cowen finds himself operating in more adverse economic conditions. The inevitable correction in the housing market seems set to intensify, and to slow the pace of growth. And as housing completions decline, unemployment is certain to rise.
The economy is now preparing to undergo a necessary, and long overdue, adjustment, from excessive dependence on property-related activity to a lesser dependence on any single area of economic activity. Last year some 17 per cent of tax revenue came from the property sector, which was double the 7 per cent figure in 2001. That represents a remarkable change in just five years. It is also, however, a measure of the disproportionate, indeed distorting, role that property occupies in the Irish economy. That is now set to change.