As he had previously noted, MoF had revised FY’12 – and accordingly monthly – budget targets in the September preliminary budget execution bulletin (released on October 11), incorporating its latest forecasts included in the 2013 draft budget tabled to parliament on October 1. It is reminded that FY’12 net revenues were revised downwards by €2.5bn to €49.0bn, expenditure by €1.1bn to €61.9bn, while budget deficit is now targeted at €15.5bn, €1.3bn above previous estimate and primary deficit at €3.7bn, €2.6bn higher than initial forecast.

According to the final September budget execution data released today, revenues (excl. tax refunds) resumed a negative trend in September significantly dropping by 24.5% y-o-y, after an exceptionally good performance in August (up 24.7%), reflecting (among others) the extension given to taxpayers to pay September tax obligations in October. It is noteworthy that direct taxes rose 4.9% y-o-y to €15.0bn, reflecting a reduction in income tax by 3.1% to €9.2bn, more than offset by a substantial rise in property taxes to €2.2bn, while indirect taxes fell 9.3% to €18.7bn. As a result, revenue drop accelerated in 9M’12 to 5.8% y-o-y, from 3.1% in 8M’12, to €36.7bn. Despite the target revision, 9M’12 revenues continued falling short of targets by €0.75bn (from €1.45bn in 8M’12 under the previous targets).

Primary expenditure continued heading south for eighth month in a row, yet at a decelerating pace, easing by 5.3% y-o-y in September, following a drop of 14.7% in August and 17.4% in July, bringing the 9-month figure down 8.9% y-o-y to €34.4bn in line with (revised) target. The cut in primary expenses is mainly courtesy of a 7.4% y-o-y reduction in salaries & pensions as well as in grants to social security sector respectively.

Interest payments dropped to €10.65bn down 24.1% y-o-y (FY’12 target: -28.2%), in line with target. It is reminded that a large portion of 9M’12 interest payments (€6.1bn) was recorded in March and was related to the implementation of the PSI agreement.

Overall, 9-month budget deficit slipped 36.7% y-o-y (the highest drop so far in 2012) to €12.7bn (€71m above preliminary figure). It is also noteworthy that bottom-line was supported by the significant positive contribution of Public Investment Budget (PIB), which exhibited a deficit of €0.23bn in 9M’12 from €1.66bn last year. Furthermore, 9-month reported figure bettered 9-month (revised) target by €0.8bn or 6.0%, compared to a €2.7bn or 18.0% outperformance in 8M’12 under the previous target. Despite the softer performance in September, 9M’12 bottom-line still provides a cushion for the fiscal adjustment efforts in the last quarter of the year.

Primary balance turned negative in September with primary deficit at €0.66bn, following an exceptionally strong performance in August, when primary balance recorded a surplus of €1.7bn. Furthermore, 9-month primary deficit stood at €2.07bn, down 65.9% y-o-y, beating 9-month (revised) target by €0.8bn or 28.1%.

Over the last six months, bottom-line maintained a constantly improving trend, with signs of stabilisation in September: Budget deficit, which stood at €1.9bn in April, gradually eased to €1.7bn in May, €1.6bn in June, €0.7bn in July, turning to a surplus of €0.7bn in August and reversing to a small deficit of €0.24bn in September. Primary balance performance followed a similar, yet more volatile, trend, with primary deficit slipping from €1.4bn in April to €0.6bn in May and €1.0bn in June, turning to a surplus of €0.2bn in July and €1.7bn in August and reversing to a deficit of €0.66bn in September. Bottom-line evolution reflects an outperformance of expenditure more than offsetting revenue shortfall, both in absolute numbers and relative to targets, and shrinking PIB.