July Exchequer Returns

“What’s our 2009 budget deficit looking like after this?”
Very very large. Tax of 30b id say, spend of 60+

Just copying this from the DofF review thread.

http://www.finance.gov.ie/documents/exchequerstatements/2009/July09pdfvers.pdf

Interesting to see that the much maligned pension levy only raised €2.5million to the end of July – see table on page 2.

I’m not PS myself, but I understand that the levy has been in place for four months now. Is this right?

And would this then mean that the levy is only likely to raise a total of €7.5m for the year?

DoF made its latest projections in the dying days of April.
So 3 months to the end of July.
3% error has now opened up in the aggregate figures.
1% DoF error per month of forecast, cumulative.

Makes you wonder about their NAMA valuation model.
10 years = 120 months = 120% error.

The sad thing is that this very amateur piece of extrapolation is more likely to be right than anything emerging from DoF.

Did they review their forecasting ability in their recent review of capacity.
In the words of Mr. Gogarty;
“Did they fjuk?”

some very punchy, and scary comments here
http://trueeconomics.blogspot.com/2009/08/economics-05082009-irish-exchequer-back.html
Such as
“total tax receipts are now 3% below target. Linear projection implies another 5.2% in deterioration over DofF projections through December – an annual fall off the target of ca 8%, bringing tax revenue to €31.6bn not €34.4bn as envisioned in DofF’s April 2009 framework.”

and
“Non-voted current expenditure is often overlooked by analysts, but the figures relating to the burden of our debt (just 18 months into the fiscal ‘solutions’ to our crisis) are telling. Interest on bonds now accounts for 10.2% of our entire tax revenue (up from 6.32% in 2008). Total cost of financing these bonds now amount to 13.55% of entire tax intake (up from 8.46% in 2008). We are already drowning in a sea of debt.”

and

“what is already clear from this data alone is that despite Mr Lenihan and other officials heralding the turn around in Irish public finances that was ‘recognized by international markets’, their own data shows that this turnaround was about as real as Mars Attacks was a documentary.”

Is no one concerned at how low our tax burden is. If as Brian Lucey says our tax revenue will be 30bn for the year assuming our economy is worth 170bn, our tax burden will be less than 20%.

Now in the McCarthy report, it estimates that govt revenue for 2009 will be 51.3bn or 29.9% of GDP or 35.6% GNP(table 1.1). I assume this is income taxes and prsi, health levies, eu transfers for cap.

Even so, our tax burden is excessively low and very few are shouting about it, save Garret Fitzgerald. The commentaria too are guilty preferring to cut rather than tax and as for the opposition ‘can’t tax your way out of a recession’, hopefully George Lee will be able to tell them, in our case, there is ample room for taxes.

@Maurice
The forecasting margin of error is much larger than 3%.

They are 3% off on the total for the first 7 months but that includes 4 months they already knew for certain.

Over the 3 months of the forecast they expected revenue of €10,754m but the actual revenue was only €10,179m. That is a forecasting error of 5.7% in just 3 months.

The July forecasts are even worse. They predicted revenue of €3,266m but the actual was only €2,880m. That is a margin of error of over 11%.

I would agree with Brian Lucey, can’t see revenue being above €30bn for the full year.

@damien

so what do you want to do?
*increase corporation tax to 30%
*increase VAT on food to 20%
*increase the marginal rate of income tax to 60%

@Damien and JL

Our average income tax burden is very low. In particular, low to middle income earners pay very little in tax.

See the charts at the bottom of this webpage

http://www.oecd.org/document/6/0,3343,en_2649_34533_42714758_1_1_1_1,00.html#3_Excerpt

JL’s suggestion that the income tax burden be raised through increasing the marginal tax rate is perhaps premised on the constant agreement that “those at the top should take more of the hit”. However, we already have a very progressive tax system and far more money can be raised through small increases on the middle earners than through big increases on the rich.

I’m not really being prescriptive here but I do find it interesting that the incredibly low rates of income tax paid by low and middle earners (even including the new levy) is hardly ever discussed. I have meant to write posts about this but never got around to it aprt from mentioning it in my McGill paper. I should probably dig up some more figures and discuss them here.

@Dreaded Estate.

You are of course correct aboout the scale of the error ginen that they had almost 4 months money in the bag when they made their projection. For once I am guilty of understating the shambles.

Simple fact is there is a crisis of Confidence in Ireland. We have none in ourselves, in our Government, in our Politicians, in our economy and in the future. This country has become obsessed with the recession,the state of Government Finances, the Banks, Property values, Devolopers and their loans and fear of unemployment and resulting possible personal financial ruin. How can we the people have any Confidence when there is no leadership of the country ?

They can fiddle around with tax rates and expenditures but the fact is that the average citizen will retreat more into their shells until someone at the top steps up to the mark and “communicates” with them as to what exactly is going to be done and will work to sort this mess out. Bad as Haughey was he appointed an enforcer Ray Mc Sharry to deal with the economic mess created by a previous FF Government in the 1977 election. Restore Confidence to the citizens and the economy including Government finances will start to right themselves.

These figures are awful.
Every time the government does something it gets worse.
Not that I am saying that they should do nothing – quite the reverse they need to get ahead of the curve.

So what is happening?
It holidays for everyone.
Just like last summer.
And no one will implement even one tiny saving from Colm McCarthy’s list until 2010.
Meanwhile 2 government TDs resign the whip because women in Sligo have to travel to Galway for excellent treatment. If it were my wife, we would willingly travel to Timbuktu for excellent treatment.
Does anyone seriously believe this government can implement proper expenditure cuts in the next budget?

@ Karl Whelan

I’ve done some rough calculations.

Someone on 35000 euro a year pays roughly 5000 in PAYE, PRSI, Health Levy, Income levy. That yields a tax burden of about 14%. Now thats excluding all the tax reliefs such as rent relief, mortgage interest relief, pension relief, transport relief. Not to mention, if that person is in receipt of child allowance.

The media and increasingly the opposition shout that someone on 35k are being penalised with rates of 50%. (they leave out that this applies at the margin and the generous tax free allowance seriously reduces the effective rate). I find this commentary very unhelpful for a goverment that needs to increase the tax burden.

Moving to someone on 18000 euro a year, they pay roughly 350-400 euro a year in PRSI, NO PAYE, NO health levy(only comes into pay after 500 euro per week). Thats a burden of 2% give or take. Given that so many of our workforce earns less than these, how can the state run itself, when a very large portion of the working population pay 300 euro a year in taxes.

The Tax free allowance needs to be cut to 10000 euro from its 18-19k that it currently is. Then apply the standard rate of tax.

I find very difficult to listen to the media and people in general who like to compare VAT between Ireland and the UK, with the usual demands to cut out VAT to the UK level. The same people dont call for our income taxes to be equalised, in which case we would pay after 6000 pounds in euro terms.

The commentaria failed to grasp the tax system in its totality. ie for every tax take, it is made of a composition of taxes and tax rates. In the UK, for every £100 collected in taxes, if 85 comes from income taxes, only 15 need come from VAT. In Ireland if we want that same £100 in taxes, and if we only collect 65 from incomes, then we need 35 from VAT.

We cant call for UK VAT rates while not looking at income taxes.

WOW!
What a turnaround! I seem to recall tooting the tax take a while ago. Change of sentiment anyone?

The government is thereby committed to much more borrowing……. and more.
NaMa anyone? The international flow of funds is due to refinance the US by end of October. According to internet chatter….. So better borrow now! The money won’t be there…..

@ Damien, Karl

Yes we might have ‘low’ direct taxes in Ireland but you utterly fail to mention all the indirect taxes that cripple the economy and the middle earner.
You know the ones the people who live in the suburbs, who have no choice but to own at least one car because public transport does not go where they need to be.
Or the ones on the amount you mention of 35000.00 Euro who have bought houses and apartments in the new estates and have to pay an extra month’s mortgage plus in Management Charges to Developers for services that are not delivered because local authorities negated their responsibilities when giving planning permission and that these same people will be forced to pay property taxes, water rates and carbon taxes because there is no money to fund the same local authorities that have left them in the lurch.
You know the ones, people who pay their private health insurance (tax by another name).
You know the young people that are been consigned too be the new working poor who have no money to pay the over priced doctor or dentist with out resorting to the credit card and are slipping deeper and deeper into the quagmire of debt.
You know the ones, people that are loosing their jobs or having their salaries cut so that businesses can keep on making big profits at the expense of the country and society.
You know the ones, people who keep on paying and paying for non existent services with very breath and will be squeezed for more and more for the same non existent services!

Those economists above who are predicting a tax take of just 30 billion in 2009 are being alarmist, if not completely bonkers. It is very unlikely that the tax take in 2009 will be as low as this.

For the tax take in 2009 to be as low as 30 billion, tax revenues would have to fall by 26% in 2009 as a whole compared with 2008. In the 7 months to July 2009, the y-o-y fall was 17.6% and declining. As some of the stockbroker economists have pointed out, tax revenues fell sharply in the second half of 2008, so there is a good chance that the y-o-y fall will continue to decline. It is extremely unlikely to accelerate to 26% by the end of 2009. That would require the y-o-y fall in the remaining months of 2009 to be close to 40%. Those who are predicting 30 billion for 2009 as a whole should say if that is what they are predicting for the remaining months of 2009, because there is no sign it will be anything like that.

More importantly is why is the tax take falling below what was predicted in the recent budget? Instead of being filled with alarmist forecasts, this site could do with some better analysis of why it is occurring. My own view is that it is largely because of the unparallelled wage and price deflation Ireland is now experiencing. Nothing currently occurring in the Irish economy can be properly understood, except in the context of recognising that we are currently in the middle of a unique exercise in wage and price deflation. Wages and prices are being cut by far more than was predicted a few months ago and at a rate unparallelled anywhere else in the world. Forgive me, but I thought that is exactly what most economists in Ireland wanted? It looks as though the y-o-y inflation rates for both wages and prices in Ireland in late 2009 will be in the region of -8% to -10% (compared with positive inflation rates in nearly every other country). This deflation is, of course, also having the effect of reducing spending. So, the net outcome will probably be that Lenihan misses his budget deficit target by a very modest amount.

The level of wage and price deflation Ireland is currently experiencing is bound to have adverse budgetary consequences. Those economists who advocated it should have thought of those consequences. The sooner we get back to 4% to 5% wage inflation and 2% to 3% price inflation the better. It worked for 25 years, so I don’t see why it shouldn’t work again. By the way, I’m emailing while on holidays in Vietnam. The price of a hotel room and a diet coke (my two main extravagances) are virtually the same here in Hanoi as in Ireland and the inflation rate is 23%. It doesn’t seem to be doing them a lot of harm.

@John “The sooner we get back to 4% to 5% wage inflation and 2% to 3% price inflation the better. ”

like telling an alcoholic that the solution to his problem is to drink even more!

@ Paul.

I’m afraid the majority of those indirect taxes you listed are in part the ideological preference of the people.

If people paid more into the health system, we could do away with VHI. Assume someone on 35000 euro has a VHI policy say 1500 euro a year. After tax relief(can you imagine) at 41%, they pay 885 euro. On an income of 35k, thats an effective rate of 2.5% if they paid that in taxes. Why dont people elect to pay 2% higher taxes(effective) and abolish VHI which prices in a profits both to itself and hospitals/doctors it deals with.

On the Management fees, why dont people pay LOCAL COUNCIL taxes like companies do to provide those services. Assuming an average monthly mortgage is 1200 euro, and management fee is equivant to 1 month’s mortagage, why dont people pay a smaller fraction of that in council rates. Again, the management fee includes private profit.

On bin charges, why does that have to be private. Can the said council rates they HOUSEHOLDS should pay not include these services. ANd rather than have an individual bin, could housing estates not provide large bins at the end of streets like in some continental countries.

On public transport, or lack thereof, what is needed is a reliable service. By reliable I mean a service that works to timetable. In Switzerland, a country I am familiar with, every bus stop has a timetable unique to it. If a bus arrives 2,3 minutes early for whatever reason, it will wait until its due time to depart. In an era where [people’e time is valuable, this instils a confidence to the public the bus will not ‘be early’. In any case., the frequency of services makes this point mute but it could be applied in Ireland. Get drivers to wait at stops.

The morale of my story, if people paid more into the tax system, they would be paying less for services that they paid for privately, because they dont have to pay the profits for the private providers.

@ Paul..

And as for VAT rates, given the level of exemptions, it is entirely plauable that someone earning 18k a year and so outside the DIRECT tax net, can also escape the VAT tax net, if they purchase basic items.

I would favour widening the VAT base to apply to ever more items,. but apply a low rate.

On the tax paid point, the evidence from the OECD and from our own Revenue Commissioners is pretty clear on the tiny direct tax burden faced by the typical earner/worker. If they had kids, the average earner was actually being subsidised, not paying taxes, by the State in 2007, light years away from the 20% direct tax that is standard elsewhere in the OECD. The reduction in the tax burden on the average worker from 2002 now seems positively fiscal suicide (hindsight is 20-20 after all). Indirect taxes are on a par with other countries so that point doesn’t really hold water. (Overview here: http://www.ronanlyons.com/2009/04/27/are-irish-workers-undertaxed/)

Incidentally, a quick survey of 200 people shows that they believe the median earner should pay something like 20% tax, rather than the 4% they currently pay (http://www.ronanlyons.com/2009/08/04/turkeys-voting-for-christmas-the-people-call-for-major-tax-hikes/). (Apologies for the link-baiting.)

The overall point should not be whether spending should go from 50% of income down to 25% or tax should go from 25% to 50% of GNP, but rather where the balance will have to be struck. Surely the starting point for an overall coherent government strategy should be at least a ballpark % of income at which to balance spending and taxation… then we can fill in the details. Going the other way (as seems to be happening with ABSN and the Taxation Commission coming before any overall strategy) seems madness.

@ Damien

Local councils have colluded with the developers so that managemnet charges were apart of the planning permissions and have been structured in such away it is a legel minefield. I know of people who are paying 3000.00 Euro a year in Management charges. Think about that, for example over a five year period that means, if the charge does not rise which it does every year, they are paying 15000.00 Euro to private firms for services that the state is meant to supply through the local councils. Thats 3000 Euro a year that should be spend in the wider economy helping to create jobs in a substainable way and not lining the pockets of the people who helped get us in to this mess. Also who will now buy these properties when property tax and water rates are added. That looks like it could amount to about 1300 to 1500 euro extra a year from all the leaks that are in the media.

The middle income earner in this country has been used by all the different hued governments as the tax/cannon fodder to keep the country afloat and because they have been squeezed to breaking point the country is now on the rocks.
We need radical change and overhaul and not just the same tax, tax, tax ideas to have any hope of seeing light at the end of this long dark tunnel.
I think that sometimes reading this site, which I enjoy, people forget that the real world does not exist on a chart or graph nor is it black or white.

@ Ronan

I find your point interesting about our over reliance on property taxes. I too believe that our over reliance was not just becoming dependent on property taxes but cutting other sources of tax income.

The media would have us believe that we were spending on the back of property taxes and now we no longer have those taxes we should cut back spending. Very little attention is drawn to the fact that the govt spent relatively modestly during the boom but it was financed from property when it should have been financed by a broad and balanced tax base.

The Irish tax system has become overly progressive. It collects essentially zero (once benefits are netted out) from the median income household (particularly those with children). This is untenable when the bulk of income (integrated over all earners) is earned in the vicinity of the median. There is simply not enough aggregate income earned above the 100K mark to fund the government, not even at a 100% marginal rate.

@John
Remember a large percentage of Corporation tax and Income tax is usually collected in the second half of the year.

Income tax from the self employed/people with non paye income sources comes in on 31st Oct. Each 31st October you pay preliminary tax for the year you are in so on 31/10/09 you need to pay 90% of your 2009 income tax or you can choose to pay 100% of the previous years i.e 2008. Most self employed do the latter and pay the difference or reclaim the over by 31/10 next year. So on 31/10/08 most people paid 100% of their 2007 liability to avoid tax and penalties. 2 things will likely happen – firstly if 2008 income was down on 2007 they are due a refund and secondly their 31/10 payment will be based on that 2008 liability and will also be down.

Corporation tax in the past mainly by the end of November for companies with 31 Dec year ends. They’ve dragged a fair bit of this forward this year for larger companies which will hit the back end.

I have some sympathy with the budgeting complexities particularly when it comes to income. Even in stable years it is not easy forecasting 6 months out but in volatile ones it is frankly nigh on impossible. The answer is we don’t know what this year’s tax take will be. We hope the decline will have slowed but a lot will depend on the income tax and corporation tax take in the latter half. If much of this in 2008 was based on 2007 activity then there may be a nig decline there.

If your income is extremely volatile and uncertain then you have to take a prudent view of expenditure if you wish to stay in business (or keep the IMF away). You certainly don’t spend in anticipation of money coming in. You cut back on capital expenditure and unnecessary day to day costs. I don’t see this happening. If income is falling behind plan B comes into operation and that is cut costs.

Finally deflation is playing a part. If food prices are down say 7% then VAT on food (where it is VATable) will be also down 7% even with no volume decline. Throw in a volume decline as well and you get a double whammy.

I agree with John some of this deflation hype has been taken too far. You have people like Eddie Hobbs say to ask for the “recession discount” and Colm Rapple telling people to defer paying their lawful creditors. We are definitely better off if we have an inflation rate of between 0 and 5% as at least the amount of money in pockets when matched by wage increases will end up in the tills and keep factories and services running. What we have at present is surreal and is a winding down of business to the point where a lot of it cannot function because it not viable. Take a look at Grafton Street the premier trading street in Ireland where shops are closed down and stocks on display are a fraction of what they would have been 30 years ago when we were a lot “poorer”. What makes it worse is that we have incompetent Ministers proclaiming that business/professional people have not suffered the chill winds of recession. Does she read the papers ? When the PM hides up in his bunker on a salary/perks earned by no other Politician in the World you really do not have to ask why the Government finances are so far down the toilet.

“Someone on 35000 euro a year pays roughly 5000 in PAYE, PRSI, Health Levy, Income levy.”

It’s actually just over €6,500.

Thank you Carrigaline.

Even if someone on 35k was deducted 6500 from their salary, it would be an effective tax burden of 18%. This is far too low given 35000 euro is slighly above the average industrial wage, and substantially above the minium wage which is earned by nearly half the working population.

However, I question how you arrived at 6500 euro.

Ive done out the calculations:

Income………………………………….35000
Tax Free allowance …………………18300

PAYE(35000-18300) at 20% …………..3340
PRSI (35000-6604) at 4%………………1136
Income levy(35000-15000) at 2% ……400
Health levy(35000-26000) at 4%………360

total deductions 5236 from an income of 35000

I am guessing that you added in a pension contribution. However, I find believe people should pay for their own pension, if they want an income in retirement.

My deductions do not include tax reliefs on rent/mortgage, bin charges, medicial expenses, trade union membership or family circumstances(carer relief etc).

27 replies on “July Exchequer Returns”