Martin Ferris (Kerry North, Sinn Fein)
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Question 66: To ask the Minister for Finance if, in view of the 4.1% shortfall in income tax returns for October and the 6.3% drop in the year on year performance of these returns, he will make specific provisions in Budget 2011 to stimulate the economy; if he accepts that the strategy that has been pursued by the Government so far in terms of deficit reduction has failed, which is reflected in the continued decline in income tax returns and shortfalls in Government projections for same; if he has used economic modelling to examine the effects on the economy of injecting stimulus, rather than making cuts; and if he will make a statement on the matter. [41578/10]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Income tax receipts amounted to €8.6 billion for the first ten months of the year. This represented a decline of €579 million or 6.3% on the level collected in the same period of 2009. Budget 2010 forecast that income tax receipts would decline by 2.6% in 2010. At end-October, income tax receipts were €369 million or 4.1% below target. The underperformance in income tax receipts reflects a number of factors, including weakness in the labour market, where there have been declines in pay levels, hours worked and numbers employed. Consequently, PAYE receipts are approximately €200 million below target. The bulk of the remainder of the shortfall against target is driven by DIRT receipts which were below profile for the month of October by an amount in excess of €150 million. An initial assessment of this data suggests that this reflects the decline in deposit interest rates and the high level of debt repayment contained within the savings ratio. The strategy that has been pursued by the Government has been decisive and has been clear in its priorities since the onset of the economic crisis:

· To repair the banking system;

· To restore the sustainability of the public finances; and

· To improve the international competitiveness of the Irish economy

Much progress has already been achieved on all three fronts. The creation of NAMA has enabled the banks to cleanse their balance sheets of toxic assets and return to more normalised lending. Both Allied Irish Bank and Bank of Ireland have committed to providing €3 billion per annum to SMEs. Competitiveness improvements are also evident. Unit labour costs have improved relative to the euro area average by 63⁄4% in 2009 alone. Similarly, Irish price levels have improved considerably relative to our European neighbours, which are enhancing Ireland's export performance. Reflecting this, Irish exports are expected to grow by 61⁄4% this year and remain robust next year. Restoring the public finances to a sustainable footing is the third pillar underpinning the Government's economic strategy. To this end, five separate adjustment packages, incorporating both revenue-raising and spending cuts, amounting to close to €15 billion on a full-year basis have already been implemented.

The benefit of the adjustment measures is already evident. The public finances have stabilised with an underlying deficit of just under 12% of GDP now expected this year, in line with the underlying deficit in 2009. The Government's stated aim is to reduce the deficit ratio to 3% of GDP by 2014 and the four-year Budgetary Plan that we will publish later this month will provide further details on this. It is encouraging that the main Opposition parties share Government's commitment to reduce the deficit ratio to 3% of GDP by 2014 and some to the need for significant frontloading in the context of Budget 2011.

While progress has been made, more work remains to be done. The Government announced last month that further adjustments of €15 billion would be required over the four year period 2011-2014 to achieve a deficit of 3% of GDP by 2014 and last week announced that there would be a significant frontloading of that adjustment with €6 billion worth of measures pencilled in for 2011. This further illustrates this Government's determination to put the public finances in order and means that over two-third of the required adjustments will have been implemented by the end of 2011.

The Department of Finance's forecasting methodology includes assessing the impact of potential fiscal adjustments on the wider economy. For example, in the 'Information Note on the Economic and Budgetary Outlook 2011-2014' a budgetary adjustment of €6bn is estimated to reduce the rate of growth by somewhere in the region of 11⁄2 - 2 percentage points. Given that there is a borrowing gap of over €19bn in the public finances and that the debt servicing as a percentage of tax revenue has increased from 3.4% in 2007 to 13% this year, suggestions of injecting a stimulus into the economy is not appropriate. Furthermore, as is widely accepted, given the openness of the Irish economy, a substantial amount of any stimulus would be lost through higher levels of imports.

Implementing a budgetary adjustment programme that narrows the gap between expenditure and revenue to a deficit of 3% of GDP by 2014 is the agreed Government strategy most suitable to our current economic situation. This view is shared by the main Opposition parties and is endorsed by the EU Commission, the ECB and the IMF.