Dáil Éireann debate -
Wednesday, 24 Oct 2001

Vol. 542 No. 6

Written Answers. - Tax Yield.

Dick Spring

Question:

86 Mr. Spring asked the Minister for Finance the reason for the shortfall in tax revenues disclosed by the end of September 2001 Exchequer returns; if he is satisfied with the methodology used at budget time to estimate the likely increase; and if he will make a statement on the matter. [25371/01]

Minister for Finance (Mr. McCreevy):

The budget day forecast for tax revenues, implied an increase of 12.5% in receipts in 2001 over the 2000 out-turn. This compares with an increase of 2.2% for the first nine months of 2001 over the same period last year.

The tax forecast was predicated on economic growth of 8.8% in GDP terms and assumed the broad pattern of income and expenditure, which was observed in the recent years of strong growth in taxes, would continue in 2001.

Since last December, a number of occurrences have combined to reduce expected growth in the economy. There has been a very dramatic slowdown in the global economy. Last autumn, the European Commission forecast EU economic growth for 2001 at 3.1% and US economic growth at 3.3%. By April of this year, the Commission had revised its 2001 forecast for EU growth to 2.8% and had halved its forecast for US growth to 1.6%. In the six months since April, the economic outlook has clearly deteriorated further.

As would be expected, the international downturn is having a negative effect on domestic economic growth. At the time of the publication of the Economic Review and Outlook in August, the forecast for 2001 GDP growth had fallen to 7.2%. The impact of the attacks of 11 September in the United States will have a further negative impact on this forecast.

The restrictions which were put in place earlier in the year, to prevent the spread of foot and mouth disease also had a dampening effect on economic growth and a significant impact on tax revenues. The nature of the restrictions had a more detrimental impact on some sectors of the economy, particularly in the areas of tourism, leisure and entertainment. They were also at least partly responsible for the sharp increase in the number of Irish people holidaying abroad this year. VAT receipts and excise duties were particularly badly hit by the restrictions.

The number of new cars registered to end September 2001 had fallen by 29% over the same period in 2000. Because of the high tax content of new cars, this reduction has resulted in a reduction in the level of excise duty in 2001 over 2000.

In addition to the above, tax concessions of approximately £100 million, over and above those given in budget 2001, were made in the Finance Act earlier this year.

The methodology to estimate the level of tax receipts in 2001 is similar to that used in recent years and is detailed in the report of the tax forecasting methodology review group, which is available on my Department's website. The forecasting methodology is kept under constant review by my Department. It is clear however that the relationship one observes between tax revenue and economic growth at high levels may not be as robust when economic growth suddenly and sharply deteriorates. This factor will have to be taken account of when framing future forecasts.