Central Bank warns on plight of public finance

The Central Bank has warned that the Republic could breach the terms of the EU budgetary pact this year and risk censure from the European Commission, writes John McManus.

In its summer bulletin published yesterday, the Bank describes as optimistic the expectation that the General Government financial position will be in balance this year.

The General Government balance is the measure used by the European Commission to monitor how member-states are following the rules governing monetary union. It is calculated by adjusting the Exchequer balance, which is the more normal measure of the health of the Government finances. The Exchequer surplus would have to show a substantial deficit before the more generous General Government balance would be in the red.

The Central Bank's downbeat view puts it at odds with the Minister for Finance, Mr McCreevy. As recently as last Tuesday he reaffirmed his Budget day prediction that the Exchequer balance would be surplus to the tune of €170 million at the end of the year.

A spokesman for the Minister said yesterday that the Department remained confident that the Budget day forecasts were reasonable.

The Central Bank points to "continued momentum in public spending and slower increases on the revenue side" as reasons to believe that the General Government balance may run into deficit.

Half-year Exchequer returns due next week will show whether the deterioration in the public finances is continuing, as the Central Bank seems to have assumed.

The most recent figures - published at the start of June - showed that income tax receipts were running some 16 per cent behind the Budget day estimate, while Government spending was 27 per cent ahead.

"It is evident that the public will have to be satisfied with a more modest provision of public service or will have to be called on to pay for these through charges and fees or through higher taxes," the Central Bank warned yesterday.

It added that fiscal policy should now "be set on a broadly neutral course".

It has also warned the Government against adopting a hands-off approach to inflation, which is currently running at 2 per cent above the EU average.

"Inflationary pressures stemming from strong internal demand can, realistically, only be countered by a slower rate of growth in domestic demand. The stance of fiscal policy has an important role to play in this regard."

Higher inflation here compared with competitor countries will eventually slow the economy and reduce inflation pressure. But waiting for inflation to subside of its own accord would be "relatively risky", believes the Bank.

The warning from the Bank came as the European Commission released an early estimate of the euro-zone inflation figure for June of 1.7 per cent. This is the lowest level since December 1999 and the first time it has been under the European Central Bank's target figure of 2 per cent since May 2000. Irish inflation is currently running at 4.7 per cent and is not expected to subside in the near future.

Fine Gael said yesterday that the Central Bank had spilled the beans on the Government's handling of the economy.

"The Central Bank's warning on the rapid deterioration of the public finances is timely. The General Government balance has swung from a surplus of 4.5 per cent in 2000 to a zero balance this year," said Mr Richard Bruton, the Fine Gael spokesman on finance.

It was now clear that the Government's ambitions in relation to taxation, to spending and to borrowing were incompatible, he said.

The Central Bank has left unchanged its forecast that the economy will grow by 3 per cent this year. It said that towards the end of the year, growth could be closer to 5 per cent.