Ireland hits 2011 budget target despite tax shortfall

Ireland's national flag flies above a statue on O'Connell Street in Dublin December 5, 2011.

DUBLIN (Reuters) - Ireland met budget targets set for 2011 under its EU/IMF bailout despite missing its tax revenues target by 873 million euros (723.4 million pounds), data showed on Wednesday.

Receipts were hit by a fall in sales taxes - the government's main tool for raising additional funds in 2012 - that deepened in December. A delay into January of the payment of some 261 million euros in corporation tax receipts due last month also accounted for part of the shortfall.

Revenues ended 1.8 percent behind expectations, a slightly better outcome than the government had reckoned with last month.

Dublin said it had still met fiscal targets, due to a tight lid being kept on spending, which was 1 percent below budget.

"The 2011 figures are slightly ahead of estimates included in budget 2012 and we have met our budgetary targets set as part of the EU/IMF programme for 2011," Finance Minister Michael Noonan said in a statement.

"This is to be welcomed although we cannot lose sight of the fact that tax revenues were somewhat less than originally planned... Nonetheless I am confident that the 2012 tax forecasts will be delivered."

Overall, Ireland's budget shortfall widened to 24.9 billion euros at the end of December from 18.7 billion euros a year ago, largely due to capital injections for the country's banks.

Stripping out the near 11 billion euros in capital funnelled to the banks and including a 1 billion euros gain from the sale of part of the state's share in Bank of Ireland (BKIR.I), the underlying deficit fell by 2.75 billion euros.

DOWNSIDE RISKS

Under the terms of its bailout, Dublin must shrink its deficit to 8.6 percent of gross domestic product this year from an estimated 10.1 percent in 2011, against the backdrop of a worsening euro zone debt crisis that threatens to undermine hopes of a return to export-led economic growth.

"This is yesterday's news, it's all about 2012 now," Alan McQuaid, chief economist at Bloxham Stockbrokers said.

"Even allowing for the bonus of the corporation tax receipts in January, it's still going to be a tall order to meet the budget targets given the worsening growth projections and risks to the economy, which are clearly to the downside given what's going on both domestically and globally."

Dublin needs its economy to grow by 1.3 percent and a package of spending cuts and tax hikes to achieve a targeted budget adjustment of 3.8 billion euros if it is to meet its deficit reduction target for the year.

The government increased the top rate of sales tax by two percentage points this week, but a 3.6 percent year-on-year fall in VAT receipts last year indicates it may struggle to secure the 670 million euro boost it hopes to get from the measure.

That figure represents almost three-quarters of the 1 billion of new taxation measures Dublin announced last month in its budget for 2012, the latest in a long line of austerity drives.

"You have to ask yourself, if VAT is performing as poorly as it has during 2011, why is it suddenly going to pick up in 2012?" McQuaid said.

"I'd certainly be concerned about this assumption that they are going to get more revenue in by just hiking the VAT rate. Clearly consumers are in no mood to spend. I'd be wary that they are being too optimistic."

Income tax receipts also came in 2.3 percent behind target but were 22.4 percent up on 2010 owing to budgetary measures introduced a year ago while corporation tax -- minus the late payments - raised 12.4 percent or 500 million euros less than anticipated.

($1 = 0.7747 euros)

(Reporting by Padraic Halpin; Editing by John Stonestreet)