Strong Exchequer performance in November

05 December 2018

The penultimate Exchequer Returns of 2018 show a strong performance, with tax receipts in November coming in 7.3% ahead of profile (target), producing year-to-date tax receipts of €51.4bn that are 2.4% (€1.2bn) better than profile.

Year-to-date tax revenues have grown by 7.6% y/y, with all but two areas seeing growth. The outliers are Excise (-10.3% y/y, due to inventory build last year relating to the introduction of plain packaging for cigarettes) and Motor Tax (-4.6% y/y, reflecting tepid new car sales in the face of competition from cheap UK imports given the weak pound). 

In cash terms, the biggest growth this year was in Corporation Tax, +€1.8bn (+23.4%) and €1.6bn (20%) ahead of profile. This outperformance has been well flagged. The solid annual growth in both Income Tax (+€1.2bn or +6.4%) and VAT (+€0.9bn or +6.5%) reflects positive developments in employment and earnings (both showing annual growth of c. 3% at this time). 

The ‘capital taxes’ – Stamp Duty, Capital Gains Tax and Capital Acquisitions Tax – are all showing annual growth of between 12.6% and 31.3%, reflecting a sharp recovery in asset values (the strongest growth, in CGT, may be flattered by the prior utilisation of losses carried forward). On the spending side, net voted (discretionary) expenditures are +10.7% y/y led by a 45.5% jump in capital expenditure (day-to-day outlays are +8.2% y/y). Most of the growth in capex is in the areas of Transport and Housing. 

While the growth in spending is very large, it is not unexpected, with net spending €232m or 0.5% higher than had been expected for the first 11 months of the year. Staying with spending, year-to-date interest costs on the National Debt were €244m or 4.2% lower than guidance, helped by favourable new issuance costs. Excluding transactions that have no general government impact produces an underlying deficit of €525m for the first 11 months of the year, which compares to the profile of a €2.3bn deficit. Last October’s Budget Day forecast guided a FY18 general government deficit of €315m (i.e. a deficit equivalent to 0.1% of GDP), so on the assumption that December is another strong month for the Exchequer we should see at least the achievement of that target. 

Irish Economy: Unemployment reduces once again 

The latest Monthly Unemployment release from Ireland’s CSO shows that the seasonally adjusted rate of unemployment fell 10bps m/m to 5.3% in November. This is the lowest unemployment rate since February 2008. During the recession the rate peaked at 16.0% in early 2012 before gradually retreating to its current level. 

With employment growing at 3.0% y/y in Q318, we would expect to see labour market conditions continue to tighten. 

Irish Economy: Services PMI little changed in November 

Today’s Services PMI release from Markit shows that the headline Services PMI was little changed at 57.1 in November versus the previous month’s 57.2 outturn. This represents the slowest pace of expansion in eight months – although the reading is still consistent with a sharp rate of growth. The release shows that New Business rose at the slowest pace in two years while Business Confidence has dipped to a 63 month low, likely reflecting Brexit uncertainties. Given this softening, it is no surprise that the Employment index has moderated to a six month low. 

On the margin front, input cost inflation moderated to a six month low while output charges rose at a “sharp and accelerated rate” to their joint-highest in the past three years. Where input prices rose, this was down to higher fuel, material and staff costs. Despite the cooling in the Confidence index, 43% of services firms still see growth next year. 

Irish REITs: Crane count up to 104

The latest Irish Times / Savills crane count for Dublin shows that a record 104 machines were on the Dublin skyline on December 1. This represents an increase of two on the previous monthly total, which was in itself a record. Some 39 cranes were active north of the Liffey, which represents a decline of six in the month, while the 65 (+8 m/m) cranes active on the south-side are increasingly skewed towards the suburbs, as many of the large city centre schemes near completion. The continued uptick in activity is likely driven by the residential market, as commercial activity looks to have passed the peak in terms of new build in the current cycle. 

Three strikes for May

PM May suffered an embarrassing three defeats in the House of Commons yesterday, the first time a government has lost three votes in the same day since 1978. The first two defeats came over the publication of the government’s legal advice over Brexit. The government had initially attempted to delay proceedings by sending the contempt of Parliament charge to the Privileges Committee but the government was defeated by a vote of 311 to 307. The government was then found in contempt of Parliament for not publishing the full legal advice as demanded; the vote stood at 321-299, which now means that David Lidington or Geoffrey Cox or possibly both are suspended. The DUP voted against the government on both counts. The third defeat came on an amendment put forward by Tory MP Dominic Grieve, which the government lost by 321-299 as Tory rebels voted against the government. 

Grieve amendment crucial

In the event that the government loses the meaningful vote next week, as is expected, the government is required to return to Parliament within 21 days, laying out what it intends to do. The Grieve amendment would ensure that any motion brought forward by the government on what it plans to do next in such circumstances is amendable, rather than in neutral terms. Does this dramatically alter the governments hand, we suspect not, instead we would suggest that it formalises the process of what we thought might happen in that following the vote next week, where PM May is highly likely to lose, we suspect that quick negotiations would resume with Brussels to make very marginal tweaks on the Brexit deal before returning to Parliament again for a second vote. At the margin last night’s defeat makes the chances of a second referendum slightly greater although we still suspect this is unlikely, whilst at the same time the chances of a ‘no deal’ are slightly lower.

Market fallout

The S&P500 index closed 3.2% down yesterday following a reassessment of the outturn of President Trump’s talks over trade with China’s President Xi. Moreover economic concerns rose with a further flattening of the Treasury curve – the 2y v 10y is now +11bps. When asked about the curve, New York Fed President John Williams said that he did not want to lose sight of the ‘data in hand’. Note that it is a market holiday today to commemorate President H W Bush. Hence today’s scheduled data releases will not take place and Fed Chair Jerome Powell’s testimony to Congress will also be postponed. However the Fed’s Beige Book will be published overnight as planned.

Economic Forecast

09.00 EZ Markit Composite PMI
09.30 UK Services PMI
10.00 EZ Retail Sales
14.45 US Markit Composite PMI