ECONOMICS: The outlook for 2003 has worsened by €7bn in little more than a year, so private and public finances must be tackled to secure legacy of boom.

On the morning of the election, we wake to an Irish economy that changed dramatically during the lifetime of the outgoing Government. By the time the next Government leaves office, Ireland's economic landscape could have altered radically once again. Whether these changes result in the gains of the boom being built upon or frittered away remains to be seen.

We were only really getting used to the boom when it ended. Although the tiger's pawprints were not seen in every corner, expensive houses, new cars and a taste for all that money can buy became very visible characteristics of this economy in recent years. Critically, the boom instilled a belief that these trappings would be permanent features of the new Ireland.

The outlook for the Irish economy remains bright, but any assumption that growth in the years ahead will mirror the intensity of the recent boom could lead to problems in some key areas. A major worry is the emerging trend in the public finances. The budget numbers have been getting poorer for some time. Unfortunately, that hasn't altered what people expect of public services and tax, or what politicians promise to deliver.

The past few years were exceptional and had an extraordinary impact on the Government coffers. During the peak of the boom, between 1998 and 2000, tax revenues increased by about one-third. This encouraged a sharp rise in public spending because the country was believed to be awash with money.

As a result, controlling public spending was not a serious issue. Budget decisions were taken on the basis that the boom would be a permanent feature of the Irish landscape. So, day-to-day Government spending rose by one-third over the past two years, at an annual rate nearly double that of the three preceding years. Spending growth is extremely strong again in early 2002, while revenue growth has weakened sharply in the past year.

Dramatic changes in the outlook for budget 2003 illustrate how much slippage there has been in the public finances. When, at the height of the boom, Mr McCreevy presented budget 2001, he predicted a surplus of around €3.2 billion in 2003. By last December's Budget that figure had become a deficit of €3 billion.

Recent Exchequer returns suggests that when Budget 2003 is finally presented, that deficit could easily swell by a further €1 billion, perhaps more. So, the 2003 outlook has worsened by about €7 billion in little more than a year.

These numbers are on a scale so far removed from most people's reality that it may be difficult to appreciate what they mean for the Irish economy. Neither politicians nor the public at large may fully realise the extent to which expectations will have to be revised in a post-boom economy. Our partners in EMU probably do.

The Stability and Growth pact requires that Ireland run a balanced budget over the economic cycle. A new Government could face considerable criticism if, as seems possible, its first budget envisages a deficit of 1 per cent or more of GDP. Remember, there was a surplus of 4.5 per cent of GDP just two years ago. Extrapolate this trend forward and Ireland hits the boundary of Maastricht Treaty limits very quickly.

How quickly the expectations of politicians and public adapt to post-boom realities will determine how painful the adjustment to more modest growth will be. One complicating factor is the persistence of stubbornly high inflation, particularly across the spectrum of services where double-digit price increases have become the norm.

This year is likely to be the first in a decade in which the standard of living in Ireland, as crudely measured by the growth rate, increases by less than the cost of living. During the boom years, living standards rose two, three or even four times the inflation rate.

In a perfect world, budget plans would be altered quickly and decisively. Domestic cost pressures would fade as growth eased. Unfortunately, businesses and wage earners may be slow to ratchet down expectations with the promises of the boom and the election campaign still ringing in their ears.

The risks to the Irish economy from a poorer trend in domestic costs would be far greater if weaker public finances were to cause a slow-acting Government to raise tax. In terms of the absolute levels of costs and taxes, the Irish economy remains very competitive, but it is difficult to manage a controlled rise in either without threatening a haemorrhage of investment and employment. The early 1980s provide painful lessons in this regard.

The intention of this piece is not to suggest the Irish economy faces impending doom. It is to highlight emerging risks in a much changed outlook. These risks can be overcome by early action. There are already encouraging signs in a controlled easing in credit growth, in the relatively modest rise in the unemployment rate and in a uptick in activity that suggest the Irish economy can successfully manage a testing transition period.

If private and public finances are tackled properly, the legacy of the recent boom will be enduring gains rather than damaging excesses.

Austin Hughes is chief economist with IIB Bank