ESRI says 'minimalist' budget would be prudent

The Government should take advantage of lower public expectations on tax cuts and spending growth by delivering a neutral budget in December, according to the Economic and Social Research Institute (ESRI).

The advice from the think-tank is based on a picture of rapidly deteriorating public finances, which the Minister for Finance, Mr McCreevy, has admitted will force him into deficit this year.

"Budget 2003 may be the first budget in nearly a decade when there will be diminished public expectation of reductions in taxation and substantial increases in public expenditure," the ESRI says in its Budget Perspectives 2003, published yesterday.

The think-tank argues that the "prudent" approach in light of general economic uncertainty would be to adopt a "minimalist" budget for next year.

"Nobody is looking for tax cuts," said Mr Danny McCoy of the ESRI, who is pushing for an indexing of tax and expenditure to prices and wages so that the Budget makes no changes "in real terms".

The ESRI has estimated that full indexation could be achieved at a cost of €1 billion.

Mr McCoy says the Government's budgetary stance should remain neutral until a number of one-off influences can work their way out of the system.

Among these are funds from the sale of ACC Bank, one-off contributions from the Central Bank, a reduction in EU budgetary contributions and revenue from third-generation mobile phone licences.

"The deterioration in the public finances will only become apparent in the Exchequer balance next year when these funds are unavailable to meet tax and expenditure commitments," the ESRI advises. Other skewing factors include tax and budgetary alterations such as the move to a calendar tax year and a move to a system of tax credits.

Until such factors can be eliminated, it will be "difficult to decipher the underlying relationship between economic activity and tax revenue", according to the ESRI publication.

"If you don't know what's going on, then it's a bit heroic to start meddling," said Mr McCoy.

The ESRI is forecasting an Exchequer deficit of €3.1 billion for next year, and a deficit in the general Government balance of almost €800 million.

The general Government balance, a measure favoured by international economists, includes the finances of all arms of Government.

A key contributor to next year's budgetary outlook will be payments made under the Government-sponsored Special Savings Incentive Scheme, which is expected to cost €500 million in any full year.

More significant however, according to the ESRI, will be the implementation of benchmarking recommendations. It argues that if benchmarking is implemented fully from next year onwards, it is likely to add another €700 million to next year's projected deficit.

This impact could be even more severe, according to the ESRI, if public-sector pensions and social-welfare payments are indexed to public sector pay.

Mr McCoy admitted that the ESRI's advice was based on a presumption that "everything will work" in areas such as spending and tax revenue.

Significant risks could come, he said, from below-trend economic growth and an absence of recovery in tax revenues. Tax revenue growth is currently expected to be 7.5 per cent next year, but on the basis of Department of Finance projections of a €1.5 billion tax shortfall for 2002, such forecasts look uncertain.

Additional risks could be provided by persistently high public spending, which is currently running at 20 per cent. Mr McCreevy has committed to reducing this growth to 14.3 per cent by the end of the year.

Mr McCoy said that Mr McCreevy's "strong will" had seen him meet high targets in the past and there was little reason to believe that the same result could not be achieved this time.

He added, however, that cuts should not be made in respect of the National Development Plan, which he says amounts to "necessary public investment".