Economics:The election campaign is hotting up. People, rightly, will vote by reference to each party's full set of policies. However while "goodies" are being promised to win votes, far too little is being said about future resource prospects to enable voters to judge if promises are realistic, writes Cathal O'Loghlin. 

We need to estimate the resources both "strong" and "weak" economic growth might deliver and suggest how much might actually be available to improve public services or finance tax reductions.

My "strong" scenario assumes 4.5 per cent economic growth to 2012, driven by a positive external and a well- ordered domestic, economy.

Inflation averages 2 per cent annually, jobs growth 2.25 per cent and output per worker 2.25 per cent also. Wage increases match inflation- plus productivity at 4.25 per cent, percentage profit margins remain unchanged and nominal GNP expands by 38 per cent over 2007-12.

Property prices follow inflation, house-building eases back from its present unsustainably high rate and public investment rises from 4.75 per cent of national income now towards 6 per cent, partially offsetting jobs lost as house-building slows.

The Exchequer remains in balance (no fresh borrowing) - also assisting growth - with all "goody-money" spent as it arises. Further inward migration leads to a 6-7 per cent growth in the population.

Government revenue rises by €23 billion on the basis that all taxes are indexed - eg excises to inflation, tax credits, bands and thresholds to wages. Income and profit-related taxes rise with GNP.

With welfare benefit rates matching wage increases and people - encouraged by continued confidence - saving less of their income, VAT and excise receipts slightly outpace GNP. This offsets sub-GNP growth in stamp duty and capital tax revenues - reflecting the slower increase in house prices and declining home- building - and in income from public charges and "non-tax" revenues. Revenues grow from €61 billion to about €84 billion in 2012.

Government spending also grows however by €18 billion-plus. Today's public pay (€18 billion) and welfare (€15.5 billion) bills rise by €7.75 billion as pay/benefit rates keep pace with wages generally.

The €3.5 billion we contribute annually in EU taxes and to the National Pensions Reserve Fund increases by €1.25 billion. The €5.75 billion cost of inputs used in providing public services goes up more than €500 million. Providing extra school places, hospital beds, State pensions or the like in line with (relevant) population increases adds another €3 billion by 2012.

Keeping public investment at 4.75 per cent of national income gobbles up €3 billion and €2.5 billion more is injected to push growth to 4.5 per cent despite slowing home construction. With debt-service costs unchanged, strong growth provides up to €5 billion for "goodies".

Considerably slower growth, unfortunately, is a real possibility. The "strong" scenario actually represents a major acceleration on recent performance. Increased housing activity directly contributed about one-fifth of the average annual 4.75 per cent growth achieved over 2001-06 and closer to one-third of jobs growth - more indirectly, as extra building workers spent their earnings.

Had house-building not expanded, overall economic growth would scarcely have reached 4 per cent: had it declined - a racing certainty over the years ahead - growth over 2001-06 might have been about 3 per cent.

In addition, Irish competitiveness has worsened and external developments may be less benign.

So we must also consider a "weak" scenario. What if jobs-growth averaged 1.25 per cent and output per worker 1.5 per cent - for a very respectable 2.75 per cent economic growth, with wage rises at 3.25 per cent and inflation at 1.75 per cent annually? In this scenario, 2012 public revenues might be €15 billion higher than in 2007. Spending though, given the lower pay and inflation assumptions and a smaller - €4 billion - increase in public investment, rises by €14 billion - leaving just €1 billion for "goodies".

What does all this say about electoral promises?

Political parties must declare intentions about indexation as fully as they highlight "goodies". The foregoing estimates assume that tax bands, credits and thresholds, and welfare benefits, are indexed in line with wage increases. Anything less increases the tax burden or cuts relative living standards of the disadvantaged.

Playing fair with voters requires parties to give warning if they intend either.

There is a serious risk of promises outrunning prospective resources, unless economic growth substantially exceeds past performance. Cutting standard income tax to 18 per cent would cost about €1.2 billion by 2012 (about €700 million to bring the higher rate down to 38 per cent). Widening the 18 per cent band to €50,000/€100,000 would cost €900 million more than the €42,000/ €84,000 used in the "strong growth" scenario. €300-a-week State pensions would cost €1 billion more than the €260-a-week pensions used in the same scenario, assuming widow/er pensions rise in tandem.

Beware of promises based either on growth above 4 per cent or on revenues rising faster than national income. Optimism about growth is one way to create the appearance of huge scope for goodies.

The likely contraction in home-building requires the rest of the economy to grow considerably faster than recently to deliver a "strong" scenario. Asserting that taxes will grow faster than the economy is another. If this is suggested, insist on clear statements about (lack of?) intent to index taxes - or risk nasty surprises later on!

There can be no certainty of sizeable scope for goodies. All forecasts are fraught with uncertainty, these rough estimates included. There is a bottom line though. Pedestrian growth will provide little for "goodies". To make major promises feasible, Ireland must achieve strong growth to 2012.

The can be even less certainty that resource growth can be kept for "goodies". Other calls on the public purse will intervene - for example, increasing development aid to 0.7 per cent of GNP by 2012 will cost €500 million more than I included in my simplified public spending estimates.

We cannot count on a total absence of "shocks" - for example, might the current nursing dispute or benchmarking II push up public pay faster than the scenarios allow?

Most critically, politicians owe it to voters to show their programmes are deliverable. As well as statements on policy, they must set out their expectations for the economy and the budget to 2012 and accompany (priced) "goody-lists" with the basis for their costing.

These should be provided in good time and in enough detail to allow full pre-election evaluation. Insist on this or you risk "buying a pig in a poke".

Cathal O'Loghlin is a former assistant secretary of the Department of Finance and member of the IMF executive board.