The latest set of monthly exchequer figures, which outlines Government spending and tax receipts for the first nine months of the year, reveals a very different picture to that presented 12 months ago. Then, the Government was heading for a huge budget surplus, as revenue far outstripped spending. By year-end the exchequer balance had been transformed into a €2.2 billion surplus, rather than a planned €3 billion deficit.
That remarkable turnaround was the result of much higher tax revenue than anticipated, and much lower spending than forecast. However, last year's enviable budgetary position has been reversed. Last December, when he presented his 2007 financial statement, the Minister for Finance budgeted for an exchequer deficit of €546 million. But yesterday, with publication of the latest exchequer spending and revenue data, Mr Cowen was forced to revise his estimate figure upwards, to a €1 billion deficit by year-end. For this time, unlike the exceptional 2006 out-turn, tax revenue will be lower and spending will also be higher than the Minister's original budget day estimate.
The exchequer returns for September serve to confirm the economic slowdown that has occurred since the middle of the year, and to identify the tax revenue shortfalls. The lower than anticipated tax receipts are largely explained by the contraction in the housing market. As fewer new houses are built and sold, and fewer second-hand houses are offered for sale in a depressed property sector where house prices are falling, where interest rates are rising, and where consumer confidence has been declining, then inevitably the tax yield suffers. Not surprisingly, tax revenue from housing-related activity has failed to match expectations, with capital gains and stamp duty receipts some €500 million below target.
That said, and as Mr Cowen pointed out yesterday, the four main taxes (income and corporation tax, VAT and excise duty) which account for 85 per cent of total tax receipts this year, remain on target. And that very much reflects the strong performance of the economy in the first six months of this year, which saw GDP growth rise by 6.5 per cent in the period, but decelerate sharply since then. The Minister also said that these exchequer figures "underline the need to continue to implement prudent, sensible fiscal policies". That means curtailing current spending, which is projected to rise by 13 per cent this year, by bringing it more into line with the rise in tax revenue, which is increasing by less than half that rate.
Certainly, that will be one of the main challenges facing Mr Cowen in the December budget. As the economy slows, current spending cannot be allowed to continue to outpace the growth in tax revenue. If that were to happen, the outcome would be either higher taxes, or higher borrowing, and a deterioration in the public finances. As matters stand, Mr Cowen is well placed to avoid that situation, provided of course his action on budget day matches his declared intention of yesterday, which is "to implement prudent sensible fiscal policies".