Monday, April 13, 2009

Unprecedented fiscal balancing act necessary in Ireland

The latest budget, the second in six months, introduced on 7 April, leaves the Irish Government with a very fine balancing act. Tax revenues dropped by 13.7% in 2008 and a further 16.5% drop in tax revenue is projected in 2009 to potentially yield €34 billion, equivalent to the yield level of 2003/04. But net expenditure forecast at €49 billion is only 0.4% lower than in 2008 resulting in a budget deficit of up to 13% % of GDP. Ireland has been given leeway by the EU to 2013 to reduce the budget deficit to 3%

While tax revenue was weaker in 2008 by 13.7% government expenditure in 2008 increased by 10.2%.

Expenditure at the Department of Agriculture & Food increased by 45% to €1.69 billion. Expenditure at the Department of Health & Children increased by over 10% to €13.74 billion and, not surprisingly, expenditure at the Department of Social & Family Affairs increased by almost 14% to €9.3 billion. Expenditure on agriculture has doubled since 2003, which is surprising given that agriculture added value to GDP is only of the order of 2%.

The drop in tax revenue last year was particularly pronounced in capital gains (54%), stamps (48%) and corporation tax (20%) with the latter contracting to 2003 levels

Welfare expenditure in 2009 is forecast to grow by almost 20% to €11.1 billion financed by projected in Arts, Sports and Tourism (22.7%), Communications, Marine and Natural Resources (16.8%) and Foreign Affairs (10.8%).

Tax receipts in the first quarter of 2009 were down 23.4% on the first quarter of 2008. There were drops in all headings but the most dramatic drops were in capital gains (70%), stamps (62%), corporation tax (43%), excise (31%), customs (27%), capital acquisition (22%) and VAT (18.3%). This trend mirrors the drop in retail sales, particularly vehicles and in property transactions.

As the banking crisis rumbles on it is worth noting that private sector credit as a percentage of GDP has increased from 115% in 2003 to 214% in 2008.

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