Wednesday, July 4, 2012

Mid-Year Exchequer Returns

The end-June Exchequer Statement was released yesterday.  Here are the relevant documents.
The media reaction to the release has been glowing with examples of headlines being:
The Department of Finance are pretty upfront about all this and do provide all the necessary information required to explain why tax revenue is ahead of profile.  What is absent in all the media reports is any explanation as to why revenue is up. 

If this excess was completely unanticipated it would be a very positive development.  There have been a number of factors such as delayed Corporation Tax receipts and reclassified PRSI contributions that slightly complicate an analysis of the 2012 tax figures

Each year a monthly profile of tax revenue for the year is provided by the Department of Finance and the Tax Profile for 2012 that was published on the 10 February.  By the end of June it was expected that tax receipts would have accumulated to €16,025 million. 

As a result of a delay meaning that some 2011 Corporation Tax was actually paid into the Exchequer Account in 2012 and the reclassification of some PRSI receipts as Income Tax a revised profile was released in early May.  The updated figure was that €16,507 million of tax would be collected by June with the increase accounted for by the Corporation Tax and PRSI issues.

Just two months later we have learned that the actual amount of Exchequer tax revenue to the end of June is €17,014 million.  The difference is the €507 million excess referred to in the media.  However, given that the Department’s revised tax profile began in April it seems unusual that tax revenue for the next three months has come in €507 million ahead of target.  Or this is how it might appear.

In the original profile it was expected that €8,136 million would be collected between April and June.  In the revised profile the equivalent figure was actually slightly lower at €8,112 million.  The outturn shows that €8,293 million was actually collected between April and June. 

Tax revenue in the period since the new profile was released is €181 million ahead of target.  So how come it is being reported that tax revenue is €507 million ahead of profile?

To the end of March the actual amount of tax collected was €8,722 million.  As the March Exchequer Statement was released on the third of April we can assume that this fact was known when the revised tax profile was released a month later on the second of May.  This revision indicated that April was expected to see €2,059 million in tax collected.  Adding this forecast for April to the March outturn would give a cumulative forecast to the end of April of €10,781 million.  The revised profile actually has a figure of €10,430 million.

So the Department knew that €8,722 million had been collected by the end of March and expected that €2,059 million would be collected in April but included a figure of €10,430 million in the revised profile.  It seems that the revised profile was based on a cumulative figure to the end of March of €8,396 million rather than the €8,722 million that was known to be collected; a difference of €326 million.

Adding this to the €181 million that tax in the April-June period actually was ahead of profile gives the €507 million ‘excess’ reported today.  Of the excess €326 million was completely anticipated because it arises from using a figure at the start of the profile that is lower than reality.

This is not to say that tax revenue is not performing well; it is.  The budget had a 2012 forecast of €35,825 million (up on the €34,027 million collected in 2011).  Because of the corporation tax and PRSI issues this was revised up to €36,375 million.  The performance in the first six months of the year suggests that this can be achieved.  

In fact, using actual the March figure (€8,722 million) and the revised total for April to December (€28,005 million) means that the Department of Finance now expect tax revenue in 2012 to be €36,727 million.  This is a good performance but why not come and say that this is what they expect?

When the revised profile was released on May 2nd it seems reasonable to suggest that this would be based on the known figures at that time.  By May 2nd the March tax return was known (and the April figure was also released the same day).  Starting a profile that is €326 million below the known figure for March is a little odd but lowering the bar in this manner does mean we can expect to hear plenty of “tax revenue is ahead of target” for the next few months.   Tax revenue is rising but, at this stage, most of it is anticipated..

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