Dáil Éireann Debate, Wednesday - 10 May 2017
104. Deputy Pearse Doherty asked the Minister for Finance the methodology and components of same used to calculate the expected income tax and universal social charge revenues to the Exchequer for 2017; and if he will make a statement on the matter. [22240/17]
Amharc ar fhreagraIn general, the forecasts for all tax-heads use a broadly similar methodology. Specifically, in relation to the Budget 2017 forecasts in respect of income tax (PAYE) and Universal Social Charge (PAYE) the approach is set out below:
Firstly an estimate of the 2016 outturn was calculated last October, which became the starting point for 2017, or base year outturn. This starting point is then adjusted to take account of any known one-offs from the previous year or any one-off payments likely to occur in-year as advised by the Revenue Commissioners. In addition, any carryover effects from previous budgets are incorporated into the forecast at this stage.
Taking account of these factors the “clean base” is then grown by the macro-economic data, and relevant tax elasticities. For income tax and USC, the macro-economic drivers applied are non-agricultural pay per capita and non-agriculture employment. A wage and an employment elasticity were then applied to both income tax and USC. Following this, relevant policy changes such as the Budget day income tax package, as costed by the Revenue Commissioners, were incorporated into the forecast.
As a final check the forecasts are reviewed to determine whether the response of taxes to growth in the macro/tax base will change over time. If it is the case that certain taxes are more responsive during cyclical upswings or downturns, then judgement can be incorporated to enhance the overall accuracy of the forecast.
It should be noted that Irish Fiscal Advisory Council (IFAC) have stated previously that judgement can enrich the accuracy of the forecasts. It is important to point out that all the macro-economic data used in the official fiscal forecasts are endorsed by the IFAC in advance of the Budget or Stability Programme Updates. In addition, IFAC are responsible for assessing and commenting on the Governments fiscal forecasts and on the fiscal stance, as well as assessing compliance with fiscal rules.
As part of the continuous efforts to improve the Department’s tax forecasting performance, research being jointly conducted by the ESRI and Department, which commenced in 2016, examined the sensitivity of income tax and USC revenues to changes in income. As a result of this work published in March 2017, the Department has revised the income tax and USC revenue elasticities used in the forecasting process, which will affect these forecasts from 2018 onwards.
Finally, Budget 2017 outlines the risk to the forecast which exists between the ‘two pack’ requirement for an October Budget and the strong distribution of certain income tax receipts including those from self-employed to later in the year. This presents an in-built potential for volatility.
