| | | | | | | | | | | | | | | BACKGROUND TO BUDGET 2010
The general economic background against which Budget 2010 was delivered was undoubtedly the most difficult seen in Ireland in many years. While we still only have official growth data for the first half of the year, it seems certain that economic activity will have contracted by at least 7% in 2009.
The up to date economic data releases in the year to date testify to the challenging background facing the Minister for Finance as he framed Budget 2010: | | | | |  | Retail sales contracted by 15.8% in the first nine months of the year, and by 6.9% when auto sales are excluded;
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| | | | | | The number of people signing on the live register increased by 251,800 over the past two years, and increased by 123,500 in the first 11 months of 2009;
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| | | | | | | | Export growth was flat in the first nine months of the year, which is not a bad performance considering the weakness of external demand and the strength of the euro. However, the export growth is focused totally on the Chemical & Pharmaceutical sector, while all other sectors have experienced a sharp contraction;
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| | | | | | | | Manufacturing output declined by 1.6% in the first nine months of the year. The modern, mainly foreign-owned sector experienced growth of 6.5%, while the indigenous manufacturing sector contracted by 14.9%;
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| | | | | | Credit activity in the economy continues to weaken. In the 12-month period to October, total private sector credit contracted by 3.7% and mortgage credit expanded by just 0.2%. This reflects weakness in demand in an economy where consumer and business confidence is extremely fragile, and limited credit supply as a result of the extreme difficulties in the banking sector.
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| | The fiscal background to Budget 2010 was also extremely difficult. The exchequer returns for the first eleven months of the year were truly awful. A deficit of €22.1 billion was recorded, compared to a deficit of €7.9 billion in the same period last year. Table 1 provides a breakdown of tax revenues based on year-on-year growth and against the targets for the various taxation headings that were set out in the April supplementary budget.
It is clear that almost all categories are sharply down on the same period last year, and with the exception of corporation tax, revenues are running well behind what was targeted in the April budget.
Table 1
Exchequer Returns Jan-Nov 2009 | | | TAX HEADING
| ANNUAL GROWTH
| AGAINST TARGET
€m
| Customs
| -22.8%
| -20
| | Excise Duty | -19.7% | -21 | Capital Gains Tax
| -79.6%
| -40 | Capital Acquisitions Tax
| -20.2%
| -28
| Stamps
| -47.8%
| -64
| Income Tax
| -10.2%
| -575
| Corporation Tax
| -24.7% | +119
| VAT
| -20.5% | -749 | | Total Tax | -20.8% | -1,359 |
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| | Source: Department of Finance
Total tax receipts were down 20.8%, with capital gains tax and stamp duties particularly weak. However, VAT and income tax receipts are also very weak, despite the increase in the VAT rate delivered in the October 2008 budget and the various levies that have been introduced since that budget. This serious deterioration in the public finances reflects the ongoing weakness of Irish economic activity and the extremely difficult global background up until recently.
The Government has obtained permission to secure stability in the public finances, defined as a general government deficit below 3% of GDP by 2014. Table 2 outlines the economic assumptions underlying Budget 2010 and the medium-term budgetary framework.
| | | | Table 2 | | | | | 2009 | 2010 | 2011 | 2012 | 2013 | GDP
| -7.5%
| -1.3%
| 3.3%
| 4.5%
| 4.3%
| GNP
| -10.4%
| -1.7%
| 3.0%
| 4.1%
| 3.9%
| Consumption
| -7.2%
| -3.0%
| 2.6%
| 3.4%
| 3.3%
| Investment
| -33.9%
| -19.2%
| 4.5%
| 7.8%
| 8.5%
| | Government | -0.6%
| -3.0%
| -0.5%
| -0.5%
| -0.5%
| Exports
| -2.7%
| 0.4%
| 3.4%
| 4.0%
| 3.8%
| Imports
| -9.0%
| -2.8%
| 2.6%
| 2.9%
| 3.0%
| CPI
| -4.4%
| -0.8%
| 1.8%
| 2.0%
| 2.0%
| Unemp
| 11.8%
| 13.2%
| 12.6%
| 11.8%
| 10.8%
| Gen. Govt. Deficit (% GDP)
| -11.7%
| -11.6%
| -10.0%
| -7.2%
| -4.9%
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| Source: Department of Finance, Budget 2010
The success or failure of any budget is heavily contingent on the economic assumptions underlying it. Having contracted by 7.5% in 2009, the economy is expected to return to positive growth in the second half of 2010, and average annual growth is expected to return to positive growth in 2011 and thereafter.
Based on the assumptions that the international economic recovery gradually rebuilds momentum over the next couple of years that the banking system gradually returns to health and that Ireland’s competitive position continues to adjust in a positive way, the growth projections look reasonably realistic. The biggest question mark and the biggest risk to the economy and the public finances is definitely posed b y the crisis in the banking system, which still has a long way to run.
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