Friday, October 7, 2011

07/10/2011: Tax returns - truth and DofF-ised surreality

In his statement, following the publication of Exchequer returns for September (here), Minister for Finance, Michael Noonan stated (emphasis mine): "Tax receipts in the period to end-September were 8.7% above the same period in 2010 and slightly ahead of expectations. Although the minor surplus is due to some favourable timing factors and receipts from the Pension Levy introduced to fund the Jobs Initiative, it is encouraging that overall tax revenue is growing again. Individual tax-head performance has been mixed. VAT receipts are weaker than expected but income tax is performing well." The Minister further positioned improved tax and fiscal performance within the context of Irelands 'return to economic growth'.

Note: there is an excellent post on this topic available from Economic Incentives blog (here), although our numbers do differ slightly due to my numbers resting on explicit model for Health Levy revenues and some rounding differences. In addition, my post focuses on comparatives, including to pre-crisis dynamics and returns. I also attempt to cover slightly different questions as outlined below. Furthermore, Economic Incentives blog post also covers the issue of distorted timing on DIRT payments in April and July that I omit in the following consideration.

Another note: over the last 4 years we became accustomed to brutish spin from the previous Government when it comes to painting the tape on Ireland's 'progress' and 'recovery'. The current Government, however, is much more subtle in presenting the positive side of the 'recovery' and Minister Noonan's statement quoted above shows this. However, the real issue here is that in the name of transparency, DofF should be reporting actual figures that are comparable year on year. It's their job and they are failing to deliver on it.

The above statement, of course, raises the following three questions:

  1. Did Ireland's tax revenue performance for 9mo through September deliver a significant enough change on 2010 and/or pre-crisis performance to warrant the above optimism?
  2. Is Ireland's tax revenue performance attributable to 'return of growth'? and
  3. Are the overall tax revenues really 'growing again' in any appreciable terms worthy of the Ministerial claim?
Table below summarizes the data on tax revenues through September 2011, including adjustments to tax heads that reflect:
  • USC charge conversion from Health Levy to Income Tax measure: prior to 2011, health levy was collected within PRSI contributions, without being classified as Income Tax. In 2010, the levy collected amounted to €2.02bn for the year as a whole. Using distribution of income tax revenues across months for 2008-2010 average, I estimate that 65.9% of Health Levy would have been collected through September 2011 and account for this in the Income Tax ex-USC line. This is an imperfect estimate that errs on the downside of the overall USC impact as it disregards changes to the Health Levy rates & bands applied. In other words, my estimate assumes that USC incorporated into Income Tax today carries within it unchanged revenues from the Health Levy as per 2010.
  • Pensions levy of €457mln is aggregated in the official figures into Stamp Duty returns and the table below provides for this in the line on Stamps ex Pensions levy. Note that the target for Pensions levy receipts was set at €470mln, so there is a shortfall on the target of €13mln which I do not account for in the relevant figures, making my ex-levy estimates erring on cautious side.
  • Lastly, the total tax revenue ex-USC Health and Pension Levies incorporates the €122mln delayed payment
So let me run through the above:
  • Income Tax revenues, once the Health Levy is factored out (revealing better comparatives to 2010 and before) are up 7.65%, not 25.7% in January-September 2011 compared to same period of 2010 that the DofF claims. Compared to 2009, Income tax revenues are up just 0.6%, not 17.5% implied by DofF numbers. See any significant uptick in the economy feeding through to significant rise in tax revenues? Well, stripping out tax rates increases and tax bands widening, I doubt there is anything but continued contraction in like-to-like revenues here.
  • VAT is still tanking compared to 2010 (-2.0%) and to 2009 (-7.7%) as correctly reflected by DofF data. And VAT revenue gap is widening from H1 2011 to Q3 2011 as compared against 2010.
  • Corporation tax revenue is falling - down 6.1% on 2010 and down 21% on 2009 and that is amidst historically record levels of exports! So if you know some evidence that 'exports-led recovery' is taking place, it is not showing up in the Exchequer receipts.
  • Excise is down 1.4% on 2010 and 2.5% on 2009 and that dynamic is worsening from H1 2011 to Q3 2011.
  • Stamps are down 1.4% once we factor out the hit-and-run on Pensions, not up 58.7% as DofF claims.
  • CGT, CAT are down in double digits
  • Customs are up as DofF shows.
  • So total tax revenues are up 1.17% in comparable terms to 2010, not 8.7% as DofF claims and relative to 2009 total tax receipts are down 5.37%.
Relative to target figures are also severely skewed by USC reclassifications and Pension Levy receipts and show, in the end, that in comparable terms we are not delivering on targets. Of course, USC reclassification is reflected in the targets, so without netting out USC, total tax receipts are 0.69% behind the target as set in the Budget, not 0.7% ahead of it as DofF claims. And that is inclusive of timing error of €122mln and excluding USC reclassification change.

So what about our cumulative 'progress' since the crisis on-set in delivering on fiscal stability? Let's compare each year achievements to 2007 levels of total tax revenues:

Again, per table above, the entire set of draconian, growth-retarding tax hikes that have hit households since 2008 delivered virtually no improvement on the crisis dynamics. The shortfall on tax revenue for 9 months January-September period relative to same period pre-crisis (in 2007) in 2010 was €9,290mln and it currently stands at €9,030mln - an improvement of €260mln or less than €30mln per month!

Can anyone still claim that Ireland's public finances are on track to achieve some meaningful targets whatsoever? As Seamus Coffey (in the blog post linked above) points out: "I must say that I cannot see the justification for greeting the figures in such glowing terms" as those used by Minister Noonan and the DofF. I agree.

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